Frequently Asked Questions
Review Quiz 2 (Q10)
In Q10 of the review quiz, some students have asked about how to solve the
question. Going by steps, the solution would be as follows:
1. First calculate the Future value of the college fee 18 years from now, taking
into consideration the stated growth rate of 4%.
FV=PV x (1+g)^n
FV=12.500 x (1.04)^18
=>25.322
2. Next, using the PV of a growing annuity formula, calculate the present value
she will need to have available at the age of 18 to pay for all 4 years of her
undergraduate education:
PV of a growing annuity= CF1/r-g x (1- (1+g)^n/(1+r)^n)
= 25.322/7%-4% x (1-(1+4%)^4/(1+7%)^4) = 90.754
This $90.654 is not the final answer, as the PV we have arrived at is the PV at
the age of 17 (remember PV is always the present value in period N-1) and so
it should be forwarded one year to arrive at the PV at age 18:
= 90.754 x (1.07)
=> $97.107 ~$97.110