Case : Quilici Family

Greg and Debra Quilici own a four bedroom home in an affluent

neighborhood just north of San Francisco, California. Greg is a partner in the
family owned commercial painting business. Debra now stays home with
their child, Brady, who is age 5. Until recently, the Quilicis have felt very
comfortable with their financial position.

After visiting Lawrence Krause, a family financial planner, the couple became
concerned that they were spending too much and not putting enough funds
aside for both their child's future education needs and their own retirement.
Greg earns $85,000 per year, but with the rising costs of education, their past
contribution efforts have left them short of their financial goals.

To estimate the amount of money the Quilicis need to begin putting away for
future security some general information was obtained by their financial
planner. The couple felt that the amount of money they currently contribute
to their Koegh plan would be sufficient for their retirement needs. What they
had not accounted for was Brady's education.

Greg is an alumni of Stanford University, a private school with an extremely

high tuition of approximately $20,000 per year. Debra graduated from the
University of North Carolina at Chapel Hill. The tuition expense there is only
$2,500 per year. When Brady turns 18, the couple wishes to send him to
either of these exceptional universities. They have a slight preference for the
much more local Stanford University. The problem, however, is that with the
rate at which tuition is increasing the Quilicis are not sure they can raise
enough money.

To assist in the calculations, assume the tuition at both universities will

increase at an annual rate of 5%. Living expenses are currently estimated at
$6,000 per year at both schools. This expense is expected to grow at only
3% per year. Further assume the Quilicis can deposit their money into a
growth oriented mutual fund at Neuberger & Berman Management, Inc.,
which has historically earned a 12% return per annum (1% per month).

The couple wishes to have a pre-determined monthly amount automatically

drafted from their checking account. When Brady starts college they will
slowly liquidate the account by making an annual payment to Brady to cover
tuition and living expenses at the beginning of each year for the four years
he will be in college.

Questions:
1. How much will be the tuition and living expenses per year when
Brady is ready to attend? Give an answer for each university.
2. Once Brady starts college what will his total expenses be in each of
his four years? Again, give an answer for each university.

3. 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? (HINT: To answer this question you
need to consider the costs of ALL four years.)

4. What if the Quilicis feel the Neuberger & Berman mutual fund will
only yield 10%. How much will have to be deposited per month in
order for Brady to attend each college?
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?
Solution:
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

:FVn= PV*(1+i)n
Total Costs for Stanford = (20,000 (1+0.05)13) + (6,000 (1+0.03)13)= $37,712.98+
$8,811.20=$46,524.18

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:FVn= PV*(1+i)n
Total Costs for UNC = (2,500 (1+0.05)13) + (6,000 (1+0.03)13)= $4,714.12+ $8,811.20=$13,525.32

2)
Stanford University
Using the Future Value of Money Formula (FVn= PV*(1+i)n)
Year 1: Tuition: $37,712.98 (1+0.05)0 = $37,712.98
Year 1: Living Expenses: $8,811.20 (1+0.03)0 = $8,811.20
Year 1 Total: $46,524.18
Year 2: Tuition: $37,712.98 (1+0.05)1 = $39,598.63
Year 2: Living Expenses: $8,811.20 ( 1+0.03)1= $9,075.54
Year 2 Total: $48,674.17
Year 3: Tuition: $37,712.98 (1+0.05)2 = $41,578.56
Year 3: Living Expenses: $8, 811.20(1+0.03)2 = $9,347.80
Year 3 Total: $50,926.36
Year 4: Tuition: $37, 712.98(1+0.05)3 = $43,657.49
Year 4: Living Expenses: $8,811.20 (1+0.03 )3= $9,628.24
Year 4 Total: $53,285.73

University of North Carolina at Chapel Hill

Using the Future Value of Money Formula (FVn= PV*(1+i)n)

Year 1: Tuition: $1,714.12 (1+0.05)0 = $4,714.12
Year 1: Living Expenses: $8,811.20 (1+0.03)0 = $8,811.20
Year 1 Total: $13,525.32
Year 2: Tuition: $1,714.12 (1+0.05)1 = $4,949.83
Year 2: Living Expenses: $8,811.20, ( )1= $9,075.54
Year 2 Total: $14,025.37
Year 3: Tuition: $4,714.12(1+0.05)2 = $5,197.32
Year 3: Living Expenses: $8,811.20, (1+0.03)2 = $9,347.80
Year 3 Total: $14,545.12
Year 4: Tuition: $1,714.12 (1+0.05)3 = $5,457.18
Year 4: Living Expenses: $8,811.20, ( 1+0.03)3= $9,628.24
Year 4 Total: $15,085.42

3:
Pmt=fv(r/(1+r)n-1 * 1/ (1+r)

Annuity Due Payments Given Future Value:

Stanford University
Year 1: $123.76
Year 2: $111.53
Year 3: $ 100.93
Year 4: $ 91.65
Four Year Total: $427.87
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

4:
Stanford University
Year 1: $145.16
Year 2: $132.73
Year 3: $ 121.90
Year 4: $ 112.38
Four Year Total: $512.17
University of North Carolina
Year 1: $42.20
Year 2: $38.25
Year 3: $34.82
Year 4: $
Four Year Total: $31.81

5)
There is a positive relationship between the amount that must ne deposited every month and the
future increase in tuition and living expenses.