Michael Dundee is scheduling a savings education program for his son, Jimmy who is now 13 years old. Jimmy plans to enrol at the university in 5 years, and it should take him 4 years to complete his...

Michael Dundee is scheduling a savings education program for his son, Jimmy who is now 13
years old. Jimmy plans to enrol at the university in 5 years, and it should take him 4 years to
complete his degree in Business Administration. Currently, the cost per year is RM12,500, but
an increase in 5% rate in the education costs is forecasted annually. Jimmy recently received
RM7,500 from his grandfather as a gift; this money, is invested in a unit trust paying 8%
interest compounded annually, will be used to help meet the costs of the education. The rest of
the costs will be met by money that Michael will deposit in the savings account. He will make
equal deposits to the account in each year from now until Jimmy starts his university, for a
total of 6 deposits. These deposits will begin today will also earn 8% interest.

i.  What will the present value of the cost of 4 years of education at the time Jimmy turns
18?

ii.  What will the value of RM7,500 that Jimmy received from his grandfather’s estate when
he starts university at age 18?


iii. If Michael is planning to make his first deposits today, how large must each deposit be
for him to be able to put Jimmy through university?