Assume todays is 31 Oct 2018. James Banister, a computer software consultant, visited you, a financial advisor, to seek some suggestions and clarification with regards to his personal finance and financial markets.

Question 1 (8 marks)

 

James plans to set up some savings for the higher education of his son, Jeffrey, who just celebrates his 12th birthday today. Suppose Jeffrey will enroll in a 4-year bachelor course on his 19th birthday and the first-year tuition will be due on the same day. The remaining three tuitions will be paid on his 20th, 21st and 22nd birthdays.

 

As of FY 2018/19, university tuition is, on average, $20,000 per annum (p.a.) as of FY 2018/19 and will grow by 2% p.a., i.e. the annual fee payable would be $20,000 x 1.02 = $20,400 for FY 2019/20. After the enrolment, the annual tuition will be fixed across his four-year coursework study.

 

James will make annual contributions to the saving account, starting from now. The last payment will be made on Jeffrey’s 21st birthday. Since then, the account will cease operation. Assume the saving account is tax-free.

 

a. Bank A offers 6.00% p.a. compounding annually, while Bank B offers 5.76% p.a. compounding monthly. Which bank should James choose?

Below parts are based on your decision in Part (a).

b. How much is the projected annual tuition fee when Jeffrey enrolls in the university on his 19th birthday? For simplicity, round the amount UP to the nearest thousand, i.e. 21,432.49 is rounded UP to 22,000.

c. What is the minimum annual contribution James has to lodge into the saving account?

d. What is outstanding balance of the saving account on 1 Nov 2026? Demonstration using EXCEL spreadsheet is acceptable.

e. If James decides to contribute $13,000 annually to the account (starting from now), by which year Jeffrey’s higher education will be fully funded?

 

Please note that this solution is available in Excel Format only.

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