# Application 2 saving for college tuition n assume

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Application 2: Saving for College Tuition n Assume that you want to send your newborn child to a private college (when he gets to be 18 years old). The tuition costs are \$ 16000/year now and that these costs are expected to rise 5% a year for the next 18 years. Assume that you can invest, after taxes, at 8%. Expected tuition cost/year 18 years from now = 16000*(1.05) 18 = \$38,506 PV of four years of tuition costs at \$38,506/year = \$38,506 * PV(A ,8%,4 years)= \$127,537 n If you need to set aside a lump sum now, the amount you would need to set aside would be - Amount one needs to set apart now = \$127,357/(1.08) 18 = \$31,916 n If set aside as an annuity each year, starting one year from now - If set apart as an annuity = \$127,537 * A(FV,8%,18 years) = \$3,405

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Aswath Damodaran 18 Application 3: How much is an MBA worth? n Assume that you were earning \$40,000/year before entering program and that tuition costs are \$16000/year. Expected salary is \$ 54,000/year after graduation. You can invest money at 8%. For simplicity, assume that the first payment of \$16,000 has to be made at the start of the program and the second payment one year later.

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