Ten years from now your oldest daughter would be starting University. Her desired programme is four years long and annual tuition fees at that time are estimated at $20,000. You plan to retire in ten years and as such you would like to create a fund that would allow you to finance her studies.
a. How large a fund would you need ten years from now in order to finance your daughter's studies if you know that you will be able to earn 11% per year during her years of study?
b. Briefly discuss how a rise in the interest rate you are able to earn in her years of study would affect the size of the fund calculated in part c If interest rates increase the size of the required fund would fall since more interest would be earned on the balance in the fund over the four year period. Interest rates and present values have an inverse relationship.
C. Now assume that you will earn 9% from now till the start of your daughter's studies. You want to make ten end-of-year deposits into her university fund that will fund the 4-year stream of $20,000 annual tuition payments. How large do your annual deposits have to be?
D. Briefly discuss why the timing of cash flows affect their value.