a) Mr. and Mrs. Peabody have recently had a daughter and want to send her to private school. School fees from kindergarten through to school year 7 (primary school) is to be $32,000, while those from school year 8 to year 12 (secondary school) is to be $50,000. Mr. and Mrs. Peabody’s daughter is due to start school when she is five years old. For simplicity, assume there are 8 years of school from kindergarten to year 7 inclusive (kindergarten, yr. 1, 2,…yr. 7). Additionally, assume that fees need to be paid, as a lump sum, at the beginning of both primary and secondary school.
Required:
Draw a simple time line of the payments to help explain your answer.
How much money must Mr. and Mrs. Peabody set aside now if fixed-term deposit rates from five to 10 years are currently 4% p.a. compounded monthly, and from 10 to 20 years are currently 6% p.a. compounded monthly? There is a penalty of 10% for withdrawal of funds from a fixed-term deposit before maturity.