Example 1: Billy would like to plan for his son's college education. He would like his son, who was born today, to attend a private university for 4 years beginning at age 18. Tuition is currently $20,000 a year and has increased at an annual rate of 5%, while inflation has only increase at 2% per year. Billy can earn an after-tax rate of return of 8%. How much must Billy save at the end of each year, if he would like to make his last payment at the beginning of his son's first year of college? Draw a time line 20 21 18 |$20,000 20,000-20,000 20,000 0 15 19 The account balance method tuition inflation rate for the number of years until the child begins college. The second step is to amount which is calculated in Step 2 is the amount which must be accumulated by the time the account balance from Step 2 This approach requires three steps. The first step is to inflate the current cost of tuition by the calculate the present value of an annuity due (BEGIN mode) for the number of years the child will attend college. You will use the inflation-adjusted discount rate for this second step. The child goes to school. Step 3 determines the periodic payment that must be made to reach the Step 1: Determine the future cost of college tuition for the first year of school. 1. 2. 3. Step 2: Determine the account balance necessary to fund college education. Step 3: Determine the annual payment needed to fund college education