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Quilici Family Case Study (Time Value of Money Case Study) Lizbeth Marie Lim MA2N0226 October 21, 2014

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Quilici Family Composed of Greg (father), Debra (mother), and 5 year old son Brady. Greg is a partner in the family owned commercial painting business. Debra is a housewife.

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The visit to the financial planner Greg and Debra became concerned of their spending, and that they are not putting enough money for their son’s future education needs as well as their own retirement They have a Koegh plan (retirement plan for self-employed individuals and small businesses in the US), but they did not account for Brady’s education.

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Money Matters Greg earns $85,000 a year. Greg is an alumnus of Stanford University (Tuition = $20,000 per year) Debra graduated from University of North Carolina at Chapel Hill (Tuition = $2,500 per year) The couple wants to send Brady to either school when he turns 18, with a slight preference towards Stanford

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Money Matters (cont.) Tuition is expected to increase at an annual rate of 5% Living expenses are estimated to be $6000 per year for both schools (expecting to grow 3% per year) The couple can deposit their money into a growth oriented mutual fund at Neuberger and Berman Management, Inc. (historically earning 12% per annum)

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Questions How much will the tuition and living expenses be per year when Brady is ready to attend? Give an answer for each university. Once Brady starts college what will his total expenses be in each of his four years? Again, give an answer for each university. How much money will Greg and Debra have to deposit per month to allow Brady to attend Stanford University? How much money will have to be deposited per month to allow Brady to attend the University of North Carolina? (Consider the cost of all four years.)

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Questions (cont.) What if the Quilicis feel the Neuberger & Berman mutual fund will only yield 10 per cent? How much will have to be deposited per month in order for Brady to attend each college? What is the relationship between the amount that must be deposited monthly by the parents and the future increases in both tuition and living expenses?

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Question 1 Tuition and living expenses for both schools Stanford: Given: $20,000 for tuition (5% increase/year) $6,000 for living expenses (3% increase/year) Using the Future Value of Money Formula: FV n = PV*(1+i) n Total Costs for Stanford = (20,000 (1+0.05) 13 ) + (6,000 (1+0.03) 13 ) = $37, $8, =$46,524.18

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Question 1 (cont.) Tuition and living expenses for both schools University of North Carolina at Chapel Hill: Given: $2,500 for tuition (5% increase/year) $6,000 for living expenses (3% increase/year) Using the Future Value of Money Formula: FV n = PV*(1+i) n Total Costs for UNC = (2,500 (1+0.05) 13 ) + (6,000 (1+0.03) 13 ) = $4, $8, =$13,525.32

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Question 2 Expenses for each of Brady’s four years in both universities Stanford University Using the Future Value of Money Formula (FV n = PV*(1+i) n ) Year 1: Tuition: $37, (1+0.05) 0 = $37, Year 1: Living Expenses: $8, (1+0.03) 0 = $8, Year 1 Total: $46, Year 2: Tuition: $37, (1+0.05) 1 = $39, Year 2: Living Expenses: $8, ( ) 1 = $9, Year 2 Total: $48,674.17

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Question 2 (cont.) Expenses for each of Brady’s four years in both universities Stanford University Using the Future Value of Money Formula (FV n = PV*(1+i) n ) Year 3: Tuition: $37, (1+0.05) 2 = $41, Year 3: Living Expenses: $8, (1+0.03) 2 = $9, Year 3 Total: $50, Year 4: Tuition: $37, (1+0.05) 3 = $43, Year 4: Living Expenses: $8, ( ) 3 = $9, Year 4 Total: $53,285.73

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Question 2 (cont.) Expenses for each of Brady’s four years in both universities University of North Carolina at Chapel Hill Using the Future Value of Money Formula (FV n = PV*(1+i) n ) Year 1: Tuition: $ (1+0.05) 0 = $4, Year 1: Living Expenses: $8, (1+0.03) 0 = $8, Year 1 Total: $13, Year 2: Tuition: $ (1+0.05) 1 = $4, Year 2: Living Expenses: $8, ( ) 1 = $9, Year 2 Total: $14,025.37

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Question 2 (cont.) Expenses for each of Brady’s four years in both universities University of North Carolina at Chapel Hill Using the Future Value of Money Formula (FV n = PV*(1+i) n ) Year 3: Tuition: $4,714.12(1+0.05) 2 = $5, Year 3: Living Expenses: $8, (1+0.03) 2 = $9, Year 3 Total: $14, Year 4: Tuition: $4, (1+0.05) 3 = $5, Year 4: Living Expenses: $8, ( ) 3 = $9, Year 4 Total: $15,085.42

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Question 3 How much money should be deposited per month to allow Brady to go to Stanford? to go to University of North Carolina? Using the formula for Annuity Due Payments Given Future Value:

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Question 3 (cont.) Stanford University Year 1: $ Year 2: $ Year 3:$ Year 4: $91.65 Four Year Total: $ University of North Carolina Year 1: $35.98 Year 2: $32.14 Year 3: $28.83 Year 4: $25.95 Four Year Total: $122.90

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Question 4 Similar to Question 3, only the interest rate was changed (10% per annum) Using the formula for Annuity Due Payments Given Future Value:

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Question 4 (cont.) Stanford University Year 1: $ Year 2: $ Year 3:$ Year 4: $ Four Year Total: $ University of North Carolina Year 1: $42.20 Year 2: $38.25 Year 3: $34.82 Year 4: $ Four Year Total: $31.81

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Question 5 What is the relationship between the amount that must be deposited monthly by the parents and the future increases in both tuition and living expenses? There is a positive relationship between the amount that must ne deposited every month and the future increase in tuition and living expenses.

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