a) Find the present value of an income stream that has a negative flow of RM100 per year for 3 years, a positive flow of RM200 in the 4th year, and a positive flow of RM300 per year in Years 5 through 8. The appropriate discount rate is 4% for each of the first 3 years and 5% for each of the later years. Thus, a cash flow accruing in Year 8 should be discounted at 5% for some years and 4% in other years. All payments occur at year-end.
b) Rahman is trying to determine the cost of health care to college students and parents' ability to cover those costs. He assumes that the cost of one year of health care for a college student is RM1,000 today, that the average student is 18 when he or she enters college, that inflation in health care cost is rising at the rate of 10% per year, and that parents can save RM100 per year to help cover their children's costs. All payments occur at the end of the relevant period, and the RM100/year savings will stop the day the child enters college (hence 18 payments will be made). Savings can be invested at a nominal rate of 6%, annual compounding. Rahman wants a health care plan that covers the fully inflated cost of health care for a student for 4 years, during Years 19 through 22 (with payments made at the end of Years 19 through 22). How much would the government have to set aside now (when a child is born), to supplement the average parent's share of a child's college health care cost? The lump sum the government sets aside will also be invested at 6%, annual compounding.
c) You are saving for the college education of your two children. One child will enter college in 5 years, while the other child will enter college in 7 years. College costs are currently RM10,000 per year and are expected to grow at a rate of 5% per year. All college costs are paid at the beginning of the year. You assume that each child will be in college for four years.
You currently have RM50,000 in your educational fund. Your plan is to contribute a fixed amount to the fund over each of the next 5 years. Your first contribution will come at the end of this year, and your final contribution will come at the date when you make the first tuition payment for your oldest child. You expect to invest your contributions into various investments, which are expected to earn 8% per year. How much should you contribute each year in order to meet the expected cost of your children's education?