You are planning your finances for college. Your parents started a registered educational savings plan (RESP) for you when you were born by contributing $2,000. Each year thereafter they contributed $1,000 to the RESP on your birthday, and will continue to do so until you turn 19 years of age.
You have just turned 13, and have saved $2,000 from your paper route. You wish to augment your RESP by contributing your money as well. The day after your thirteenth birthday, you start working after school for a dry cleaner. You expect to contribute $3,000 a year on your birthday starting one year from now for the next six years, from age 14 to 19.
The government matches 20% of all contributions to the RESP. Your parents think that the annual costs of a three-year college program-including tuition, residence, books, food, and incidentals-will be $35,000 per year, payable at the beginning of the year, by the time you start college on your nineteenth birthday.
Required:
(a) Assuming an average 7% interest rate throughout, prepare a year-by-year analysis of the cash flows, including interest and college costs, into and out of the RESP to the day of your twenty-first birthday, by which time you will have completed your three-year college program.
(b) What is the minimum annual scholarship needed to cover the deficit? Assume a 7% interest rate and that the scholarship is paid at the beginning of your second and third years.