Unformatted text preview: e costs (2 annual withdrawals) of the MBA program. How large must this deposit be? a. Nominal cost ‐ Year 1 = $25,000 x 1.065 = $33,455.64 Nominal cost ‐ Year 2 = $25,000 x 1.066 = $35,462.98 b. There are numerous ways to approach this problem. First, assume the withdrawals will take place at the beginning of each year (a reasonable assumption as far as tuition is concerned). What is the total amount she will need exactly 5 years from now (when she enters the program)? $33,455.64 + $35,462.98/1.08 = $66,291.73 This is the FV of a single deposit with 8% annual interest rate. We need the PV… $66,291.73/1.085 = $45,117.04 She needs to deposit $45,117.04 Here is another approach…. Compute the real interest rate… i = 1.08/1.06 – 1 = 1.886792% Find...
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- Spring '14
- CPT PV, Convexity Correction, Duration Term