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Cost of Education Today (PDF)

Added on - 17 Jun 2021

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(1)Cost of education today=$20,000Annual inflation rate=4%Cost of education after 3 years=20000 (1 + 4%)^3=$22,497.28Amount deposited today in CD=$1,000Interest rate p.a. on CD=6%Amount in CD after 3 years=1000 (1 + 6%)^3=$1,191.02Interest rate p.a. on gift received from uncle=10%Time period (in years)=3Suppose the amount funded by uncle is A. Then,A (1 + 10%)^3 + 1191.02=$22,497.28A (1 + 10%)^3=22497.28 - 1191.02A (1.3310)=$21,306.26A=21306.26 / 1.3310A=$16,007.71He should deposit now $16,007.71 now to enter into the college 3 years later.(2)
a)YearCash flow(A)Cash flow(B)Cumulative Cashflow (A)Cumulative Cashflow (B)0-$54,000-$23,000-$54,000-$23,0001$12,700$11,600-$41,300-$11,4002$23,200$11,200-$18,100-$2003$27,600$12,500$9,500$12,3004$46,500$6,000$56,000$18,300$56,000$18,300Payback period (A)=2 + (18100 / 27600)=2.66Payback period (B)=2 + (200 / 12500)=2.02Project with lower payback period should be selected. In the given case, payback periodfor project B is less than that of project A. Therefore, as per payback period criteria,project B should be selected.b)YearCash flow (A)Cash flow (B)PVF @ 14%PV (A)PV (B)0-$54,000-$23,0001.0000-$54,000-$23,0001$12,700$11,6000.8772$11,140$10,1752$23,200$11,2000.7695$17,852$8,6183$27,600$12,5000.6750$18,629$8,4374$46,500$6,0000.5921$27,532$3,552$56,000$18,300$21,153$7,783NPV (A)=$21,153NPV (B)=$7,783Project with higher NPV should be selected. In the given case, NPV of project A is higherthan that of project B. Therefore, as per NPV criteria, project A should be selected.c)
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