Marie needs to plan to fund the higher education of her daughter Liz. Liz is expected to
Question:
Marie needs to plan to fund the higher education of her daughter Liz. Liz is expected to begin her higher education 12 years from now, for a period of five years. At current prices, this education is expected to cost Rs 10 lakhs p.a during the first year of college after which it will increase @5% p.a. because of higher costs of teaching material (non-inflationary reasons) in the higher classes. (First installment of education fee is due 12 years from now). Further, the current inflation of 4% (assumed to remain uniform all these years) is expected to increase cost of education over and above the above stated costs.
Marie is planning to start investing a fixed amount every year, starting three years from now, for 7 years. Given r (discount rate) = 8% EAR, how much should Marie invest p.a. so as to achieve the desired objective? The discount rate is a nominal discount rate.
