Your parents have accumulated a $120,000 nest egg. They have been planning to us
ID: 2761849 • Letter: Y
Question
Your parents have accumulated a $120,000 nest egg. They have been planning to
use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your
parents are giving Courtney $15,000 to help her get started, and they have decided
to take year-end vacations costing $10,000 per year for the next four years.
How much money will your parents have at the end of four years to help
you with graduate school, which you will start then? You plan to work on a
master’s and perhaps a PhD. If graduate school costs $26,353 per year, approximately how long will you be able to stay in school based on these funds? Use 9
percent as the appropriate interest rate throughout this problem. Round all values to whole numbers.
Explanation / Answer
Calculation of Present value of money available for graduate education Accumulated Nest egg 120000 Less:Money for nail salon 15000 Less:PV of Year-end Vacations 10000*((1-(1+0.09)^-4)/0.09) 32397 PV of money @ end of 4 Yrs. 72603 PV of Graduate fees from 5th year onwards Year Annual fees PV Factor@ 9% PV @ 9% 5 26353 1/1.09^5= 0.64993 17128 6 26353 1/1.09^6= 0.59627 15714 7 26353 1/1.09^7= 0.54703 14416 8 26353 1/1.09^8= 0.50187 13226 9 26353 1/1.09^9= 0.46043 12134 Total PV of annual fees upto 9th Year 72616 PV of money @ end of 4 Yrs. 72603 Total PV of annual fees upto 9th Year 72616 SO, you will be able to stay in school based on these funds for approximately 5 Years.
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