Question

Marks Case Study (Time Value of Money) Mr. and Mrs. Smith own a villa in Palm Jumeirah, Dubai. Mr. Smith is partner in a Pharmaceutical Company. Mrs. Smith stays home with their child, Harry, who is Until recently, the Smith's have felt very comfortable with their financial position. After visiting Holborn Assets Ltd, a family financial planner, the couple became concerned that they were spending too much and not putting enough funds aside for both their child's future education needs and their own retirement. Mr. Smith earns $85,000 per year, but with the rising costs of education, their past contribution efforts have left them short of their financial goals. estimate the amount of money the Smith's need to begin putting away for future security some general information was obtained by their financial planner. The couple felt that the amount of money they currently contribute to their saving account would be sufficient for their retirement needs. What they had not accounted for was Harry's education. Mr. Smith is a graduate of American University Dubai, a private university with an extremely high tuition fee of approximately $20,000 per year. Mrs. Smith graduated from the British University Dubai. The tuition expense there is only S2,500 per year. When Harry turns 18, the couple wishes to send him to either of these exceptional universities. They have a slight preference for the American University. The problem, however, is that with the rate at which tuition fee is increasing the Smiths are not sure they can raise enough money To assist in the calculations, assume the tuition at both universities will increase at an annual rate of five per cent. Living expenses are currently estimated at $6,000 per year at both schools. This expense is expected to grow at only three per cent per year. Further assume the Smiths can deposit their money into a growth oriented Investment fund at Dubai International Capital, which has historically earned a 12 per cent return per annum (one per cent per month) The couple wishes to have a pre-determined monthly amount automatically drafted from their checking account. When Harry starts college they will slowly liquidate the account by making an annual payment to Harry to cover tuition and living expenses at the beginning of each year for the four years he will be in college

Answer 1

Total Expenses Investment required per month Age Investment required per month @ Age of 18-21 3 Harry's Age Americal University Dubai Americal University Dubai British University Dubai Tution Fee Expenses Total of 18-21 Tution Fee Expenses Total Tution Fee Growth rate Tutution fee@ age of 17 yr 2500 5% 4489.64 35917.13 Living Expenses Growth rate 6000 Living expensesage of 17 yr 8554.57 8554.57 Investment growth rate 0.12 4 Q1-Ans: $13525 02- Ans: Yearl $13525 Year2 $14025 Year3 $14545

Total Expenses Americal University Dubai Total Experises British University Dubal 3 Hay'sAge Americal University Dubai British University Dubai Investment required per month Age of 18-21 Investment required per month @ Age of 18-21 Living Expenses Ivine Expenses Tution Fee Tution Fee I Total -SUMIF6:G5) Growth rate -5UM(F8:68 Tutution fee @ age of 17yr VL7,12-L6, 10 9 -810"(1 57 -C10"(1 517) -5UM(811:C11) 12 11 13 12 Iving Expenses Growth rate iving expenses @ age of 17 yr -B12 (1 $i57) -F121+SMS7 -012 (1 SM12 -SUM(F13:G13) FV(L12,12,-L11 -FVCM 12,12,,-M11.) 8137) -815"(M57) -017(1 $L$7) + S12) 15 14 16 15 Investment growth rate 0.12 10 17 17"(1.SLS12) -SUMID1&C18] 20 19 21 20 B2011-57) -C20 (1-$512) SUMIB21c21 PISL16/12),168-D21) -F201tSM$7-20(1SM$12)-SUM(F21:21) PMT(SMS16 12),168,,-H21) -PMr((SM$16/12),180, H22) ner month Invest -SUM(FIS:E22) Yeari $13525 Year2- $14025 Year3 $14545 Year $15065