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Jennifer and Campo are expat family living and working in Abu Dhabi

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Jennifer and Campo are expat family living and working in Abu Dhabi. They are saving for their
daughter Donna 's college education. Donna just turned 10 (at t = 0), and she will be entering
college 8 years from now (at t = 8). College tuition and expenses at New York University-Abu
Dhabi, are currently $14,500 a year, but they are expected to increase at a rate of 4.5% a year.
Donna should graduate in 4 years--if she takes longer or wants to go to graduate school after, she
will be on her own. Tuition and other costs will be due at the beginning of each school year (at t
= 8, 9, 10, and 11).
So far, Jennifer and Campo have accumulated $15,000 in their college savings account (at t = 0).
Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1, 2,
3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t =
5, 6, and 7. They expect their investment account to earn an interest rate of 9%. How large must
the annual payments at t = 5, 6, and 7 be to cover Donna's anticipated college costs?

1. Determine the payment (cost) of each year during the college study (t = 8 to 11) and their PV
at t = 8 (the beginning of the college), discounted at the return on investment.

2. Create a time line with those cash flows, plus the known initial CFs (t = 0 to 4). Put X in for
the unknown values for t = 5 to 7 (they will be computed in point 4).

3. Find the FV of t = 0 to 4 positive CFs at t = 8 (use r = 9%) and compute the difference between
positive (savings) and negative (college cost) at t = 8 values.

4. Find PMT for a 3-year annuity due whose FV is equal to the difference in point 3 (use r = 9%).

5. How large must the annual payments at t = 5, 6, and 7 be to cover Donna's anticipated college
costs if the interest rate increases to 12%.