Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that you son remains in this private school through high school and that your current interest rate is 6%,then the present value of your son's private school education is closest to:
A) $106,230
B) $156,000
C) $137,900
D) This problem cannot be solved.

Question

Quizplus · Accepted Answer

B) This is a bit of a trick question. The PV of a growing annuity formula is undefined since r = g. But since r = g, the growth in the payments is exactly offset by the current interest rate. Therefore the answer is 12,000 × 13 = $156,000. You could also individually discount each of the 13 payments and arrive at the same answer.

Your Son Is About to Start Kindergarten in a Private