Suppose that you are planning to enroll in a master’s degree program two years i

Question

Suppose that you are planning to enroll in a master’s degree program two years in the future. Its cost will be the equivalent of $160,000 to enroll. You expect to have the following funds:

Fromyourcurrentjob,youcansave$5,000afteroneyearand$7,000after two years.

You expect a year-end bonus of $10,000 after one year and $12,000 after two years.

Your grandparents have saved money for your education in a tax-favored savings account, which will give you $18,000 after one year.

Your parents offer you the choice of taking $50,000 at any time, but you will get that amount deducted from your inheritance. They are risk-averse investors and put money in ultrasafe government bonds that give 2 percent per year.

The borrowing and the lending rate at the bank is 4 percent per year, daily compounded. Approximating this by continuous compounding, how much money will you need to borrow when you start your master’s degree educa- tion two years from today?

Explanation / Answer

Effective rate = Effective(4%,360) 4.08% Any time Cash Flow 50000.00 50000x (1+4.08%)^2 $54,164.11 Cash Flow in year 1 = $5000 + $10000+ $18000 33000 33000 x (1+4.08%)^1 $34,346.68 Cash Flow in year 2 = $7000 + $12000 19000 $19,000.00 Total cash flow $107,510.79 Cost of Master Degree $160,000.00 Amount Borrowed -$52,489.21 Money Borrowed = 52,489.21

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