Put yourself in a parent’s shoes: You have two children, aged 2 and 6 respectively (exactly). When they are exactly 19 years old each will be attending university. You will require a lump sum for each of them at that time. For the first child to go to varsity the cost will be R 59 867.00. Due to inflation, the tuition fees for your second child will be 20% higher than for the first. You have decided to invest a single lump sum today in order to pay for both sets of tuition. The fixed deposit you are considering offers an effective interest rate of 13.5% per annum. How much should you invest today?
R 22 570.82
R 20 803.50
R 19 886.19
None of the above
The correct answer is R 19 886.19.
To calculate the total amount needed for both children's tuition fees:
Total amount needed = Tuition fees for first child + Tuition fees for second child
Total amount needed = R 59 867.00 + (R 59 867.00 * 20%)
Total amount needed = R 59 867.00 + R 11 973.40
Total amount needed = R 71 840.40
Now, we need to calculate the present value of this future amount. We can use the formula for present value of a lump sum:
Present Value = Future Value / (1 + interest rate)^n
Where:
Future Value = R 71 840.40
Interest rate = 13.5%
n = 19 years
Present Value = R 71 840.40 / (1 + 0.135)^19
Present Value = R 71 840.40 / (1.135)^19
Present Value = R 71 840.40 / 11.573592
Present Value = R 6 211.44
Therefore, you should invest R 6 211.44 today in order to pay for both sets of tuition fees.