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Eighteen years ago, a couple purchased a house for $110,000.They put 20% down, and financed the remainder for 30 years at 6.36%compounded monthly. (Show work)

a) What was their monthly payment?

b) Seven years ago they looked into paying it off to buy anotherhouse, but didn’t. What was their balance at that time?

c) Instead of moving, they refinanced at 5.21%, for theremaining term of the original mortgage. What was the new paymentas a result?

d) What is the balance today?

e) Now they are looking to make improvements, and want to knowwhat kind of home equity loan they can get. The bank is offering toloan up to 80% of the equity of the house. It has been appraisedfor $175,000. How much of an equity loan will the bank approve?

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Bunny Greenfelder
Bunny GreenfelderLv2
28 Sep 2019

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Bob Longs of Longs Jewelers returned to his store in the springof 20x5 angry and depressed. “We just lost our lease; I don’t seehow we can make it now.” It had been seven years since Bob and hiswife, Bonnie, moved their business to Spartanburg, South Carolina.They had struggled, and sometimes excelled. But primarily, throughsheer determination, they just survived in the jewelry business tothis point. The loss of their lease and prime location could be thefinal blow that would destroy their business. Bob needed to decide,and quickly, either to fold the tent or give it one more shot.

York Operations

Longs Jewelers originally started in 1978 as Able Jewelry andMusic—a pawnshop in York, South Carolina, purchased by Bob’sparents from other family members. Bob helped his mom in thebusiness after his graduation from the University of South Carolinawith a major in business in 1989. Wanting to gain more businessexperience, Bob earned his MBA from Regent University in 1993 and,with Bonnie, assumed ownership of the store on July 1, 1993.

Bob and Bonnie met at the University of South Carolina. Shegraduated in three years with a major in foreign politics and aminor in Spanish. After college she was also able to get aPara-legal degree in business and real estate law and bankruptcy.Her legal training made it easy for her to find work with a lawfirm while Bob completed his MBA.

Even though the store was a well-recognized landmark in York, itinitially had trouble earning a reasonable profit. After aboutthree years, Bob saw the 80-20 rule in action. The pawnshopgenerated 80% of the headaches and 20% of the revenue. Bob wantedthe store to be more upscale; he eliminated the electronics andmusical equipment inventory associated with the pawnshop andchanged the name of the store to Longs Jewelers. Over the next fouryears, sales and profits grew.

Bob and Bonnie lived in Spartanburg where Bonnie grew up, about30 miles west of York on I-85. Through their associations andchurch activities, they established a loyal clientele in theirhometown who would travel to York to shop at Longs Jewelers. Manyof these customers often encouraged Bob and Bonnie to open a storein Spartanburg.

In York, however, Bob had the only jewelry store that catered toa middle-class market. Unlike in Spartanburg, where there wereseveral similar jewelry stores already established, he did not haveto worry about competition. The store’s roots were in York with along history and a devoted following. Even though the drive to worksometimes seemed long, the York site was doing well.

This situation changed about ten years ago. Video poker was thenew craze, and numerous people in the York seemed addicted to it.While illegal in South Carolina, it was legal in North Carolina.Many York citizens frequently drove north a mere 10 miles to thenext state to spend their discretionary income on these games. Bobsaw a change in his customer spending habits as they bought lessjewelry, and some even said they or their spouse used the moneyinstead to gamble and “hit it big.”

At the same time, York’s Main Street was going the way of manysmall towns without a strong economic base. Downtown businesseswere shutting their doors as shoppers drove to new malls orsuperstores like Wal-Mart. The only stores that seemed to beopening on Main Street were loan companies, which offered highinterest rate loans to consumers and businesses. Within two years,this combination of events took Bob’s operation from beingprofitable to barely surviving.

Relocating to Spartanburg

Bob and Bonnie had to decide if it was worthwhile to continuetheir jewelry business. They had two young children and roots inSpartanburg. With Bob’s MBA and business experience, thepossibility of a job at a company in Spartanburg was attractive.Bonnie could stay home and raise the kids, and they would be freeof the pressure of ownership and the worry over cash flow.

It was evident that Longs Jewelers in York would not survive.Persuaded by friends and motivated by his entrepreneurial spirit,Bob developed a business plan and sought financial assistance tomove his operation to Spartanburg. To his surprise, local bankswere not as supportive as Bob thought they would be. LongsJewelers’ current financial condition did not help to qualify for aloan; it seemed too risky. The financial institutions deniedfunding.

Bob liked the idea of being his own boss, enjoyed the jewelrybusiness, and felt he had some expertise in the area. So he keptlooking for financial assistance. Eventually, he returned to hisold bank in York. Even though he was leaving town, based on therelationship he had established with the bank and with theirassistance, he qualified for a Small Business Administration loanof $60,000. Bob and Bonnie sold their house in Spartanburg and usedthe equity to add another $20,000 to start over in Spartanburg.Upon the sale of their house in Spartanburg, Bob and Bonnie andtheir two children, Hannah and Jonathan, moved from a3,200-square-foot home into a 1,200-square-foot apartment.

Spartanburg Operations

Bob secured a lease for almost 3,000 square feet in a primelocation in west Spartanburg on a busy main street across from alarge shopping center. This section of Spartanburg was experiencingsustained consumer consumption since it had easy access to I-85,and new upper-income home developments were opening on a regularbasis. The rent for the store was $3,000 per month. The stripshopping center included some other fine stores, including anupscale women’s fashion store and a quality shoe store.

Unexpectedly, Bob learned that the landlord charged him anadditional $40,000 to “up fit” the store before the first sale waseven made. In some of the other lease contracts they considered,“up fitting” was already provided, and he wrongly assumed thoselease stipulations were included in this current lease. Bob learnedthe importance of “buyer beware.” He regretted not gettingprofessional guidance before signing the lease, but he was tryingto save money and time. On top of that, Bob later learned that hisshare of the property tax for the facility was also charged to himat the end of the year as an additional expense versus being partof the monthly rent. Already cash poor, Bob used his remaining$40,000 in funds to acquire inventory.

With limited working capital, a discretionary income typeproduct with low turnover, and a seasonal business, Bob continuallyhad cash flow problems. Jewelry was expensive, and the store neededsignificant inventory to display in showcases in order to attractcustomers. He bought lots of silver, which was relativelyinexpensive, to supplement gold and diamonds.

Bob maintained a credit purchasing relationship with many of hissuppliers, but when sales did not achieve anticipated levels, Bobquickly found himself past due on many accounts. It was not longbefore some of these suppliers wanted cash up front for purchases.Conditions seemed to go from bad to worse as debt mounted. In thefirst year, the business lost over $108,000.

Bonnie and Bob both needed to work in the store because at leasttwo people had to be around to prevent theft. With theirresponsibilities as parents, family activities, commitments atchurch, working six days a week at the store was demanding andthere was little down time. They even had to give up attending orwatching the games of their beloved University of South Carolinafootball team—an activity that in the past often gave themmuch-needed relaxation from the stress of running your ownbusiness.

Fortunately, the clientele from Spartanburg remained loyal andfrequented the store even more now that the business was moreconveniently located in Spartanburg. Store hours were 10:00 a.m. to5:30 p.m., Monday through Saturday. Bob believed that the customershe was trying to reach, primarily non-working women who enjoyedshopping and socializing would shop during the day. These womengenerally entertained, wanted quality family time, and had otherobligations in the evening. Also, this was more of a destinationlocation as opposed to a mall location where there would be morewalk by traffic in the evening.

Bob and Bonnie practiced a high moral and ethical standard andunderstood the importance of trust and honesty. They were fair invaluing stones for both buying and selling purposes, which wasoften a concern by less knowledgeable customers. They were alsofriendly and got to know their customers on a first-name basis.Customer service was highly regarded in all of their businessdealings. As it turned out, many customers bought jewelryexclusively from Longs Jewelers. With over 15 years of experience,plus his educational training, Bob felt he knew the jewelrybusiness and how to make it successful.

Additionally, Bonnie, who was completely self-taught in thejewelry business, had a knack for picking the right products. Shehad always had an interest in colors and texture and was good atdetermining what looked good on fashion conscious women. As ateenager, Bonnie was paid commercial art work for the Governor ofNew Jersey. Since their market was primarily women in a middle- toupper-middle income bracket, it was important for Bonnie torecognize trends and styles when purchasing inventory. She believedin her products and her enthusiasm translated into sales tosatisfied customers. Bonnie also learned to make jewelry. Shebought older jewelry from estate sales and other secondary sourcesat a discounted price and used the materials to make new and moreappealing jewelry items. Customers adored these unique items.

Even though competition from other jewelry stores in theimmediate vicinity was fierce, Longs Jewelers effectively used goodmarketing strategy with ads in popular publications, radio, storespecials, and especially word of mouth primarily catered tomiddle-income earners. They became active in the community andsupported charitable events, which helped to give the businesscredibility. Also their products were more fashion forward andseemed to have a unique appeal to their customers. Their targetcustomers were women who looked for something better than arun-of-the-mill Kmart or Wal-Mart type of product, but not theexorbitantly priced products found at the really upscale jewelrystores. Of course, many of the other individually-owned stores weretrying to capture the same market.

As with many owner-run businesses, Bob and Bonnie focused onlittle, but significant, services. They did engraving, cleaning,and elaborate gift-wrapping at no extra charge. Their bestpromotion was word of mouth and personal friendly service.

Still with all the positive factors that Bob and Bonnie hadgoing for them, maintaining the financial viability of the businesswas still a struggle in a very competitive market. There were anynumber of factors that seemed to impact their potential for successincluding the seasonal nature of sales, high carrying cost ofinventory, high overhead costs, low sales volume, and evensometimes surprisingly low margins on items sold.

At times Bob had trouble making the monthly lease payment on thestore. This last year he was four months behind. Like manybusinesses, the jewelry business was seasonal. The majority ofsales were made during the Christmas season with other peaks inFebruary, May, and June. Months like July and August were extremelyslow. In the past, Bob caught up on the rent payments in Decemberwhen he had a better cash flow.

Over the years, Bob and Bonnie had no choice but to rely oncredit card debt, which had amounted to over $50,000. Once theywere unable to make even the minimum payment, their credit scorestumbled—and they no longer qualified for any personal loans orother credit cards. Nevertheless, they worked hard to repaysuppliers and establish a better relationship with those companiesto hopefully get more favorable terms for future purchases.

Even with their best efforts, the Spartanburg store did not liveup to their expectations. It had been seven years. What did Bob andBonnie have to show for their effort? They had already worked nineyears in York with limited success and now another seven years inSpartanburg. There were good days, but then there were also dayswhen Bob wished just to sell a watch battery. With a $3,000-plusmonthly rent, it was easy for Bob to determine that he needed over$200 in sales (assuming a 100% markup) every day just to pay therent. Sometimes Bob felt he was working for his landlord.

However, Bob and Bonnie both gained much joy selling a qualityproduct, like an engagement ring to a satisfied customer, knowingthey played a role in a special event. Bob and Bonnie enjoyedworking the store together and had complementary skills and astrong marriage even though they were together almost 24-7.

Bob surveyed what he had. His $100,000 of inventory could neatlyfit into a couple of shoeboxes! There was the large safe,showcases, fixtures and some office furniture. Of course, therealso was the $250,000 debt. He felt fortunate that some of the debtwas still interest-free and that his average cost of debt wasaround 11%. He had worked very hard to reduce the level of debtover the past few years. While the total company debt haddecreased, his interest expenses increased as his credit ratingwent down and his perceived riskiness by creditors went up.

If he left the store he asked himself: how was he going to makegood on this debt? Because of their high ethical values andintegrity, Bob and Bonnie felt badly that they had created such abad debt situation, and they felt morally obligated to make good onall of the outstanding debt. Suppliers and others had placed faithin them and given the store favorable credit terms and assumed theywould fulfill these obligations.

Future Operations

If Bob wanted to begin again, could he, especially now that hislease was terminated by his landlord? Seven years ago, he had ahouse with some equity that he sold to raise capital for thebusiness. Now, he did not even have that. It was doubtful that hecould arrange for debt financing, given his history. If he broughtin a partner, that partner would probably want 51% ownership ormore of the business, and he would lose control. Furthermore, couldhe even find a suitable location for his store close to where hehad become established?

He was aware of another location that had recently becomeavailable. It was just three blocks away, but it was only 1,250square feet, 40% of the size of his current store. Bob surmisedthat the monthly lease rate would be about half of his currentrate. What kind of other lease terms would he face with a newlandlord? Bob did not want to be surprised again with hiddencharges in another lease agreement. Also, could he afford the costof a move, especially transporting the large and very heavysafe?

There was also the issue of employees. Because of the need toalways have at least two employees on site, Bob had often hiredextra help at various times during the year. Currently, twoadditional employees had come to depend on Bob and the job fortheir source of income. They too, would have to seek otheremployment. And there were his loyal customers. Many had stuck withhim since his early days back in York. He had spent yearsdeveloping this relationship and market. Did he want to give upthis valuable but intangible resource?

If he folded the business, what would he do? For 20 years he hadbeen in the jewelry business. Working for another company injewelry, like a competitor, seemed like such a step down. He wantedto stay in Spartanburg, and he had plenty of connections. But afterbeing an entrepreneur, could he work for someone else? What wouldBonnie do? Their children were now 12 and 16. How would they reactto this situation? They had already been through a lot.

Bob pulled out his last three years of financial data to try todetermine if they even had resources or the financial viabilityavailable to make the store viable at a new location. From Bob’sunderstanding of the jewelry business, successful operations have agross margin of around 50 percent and a profit margin of at leastfive to ten percent.

Maybe it was time to consider another direction. He had an MBAand years of retail experience, surely he could find a job in theSpartanburg area in the $50,000 to $60,000 range. Plus Bonnie, withher talents and skills in the jewelry business, could easily find apart-time or maybe full time job and earn up to $30,000. Also, withsome catching up on the latest laws in the legal field, she couldprobably get a much higher paying job as a Para-legal with a lawfirm in the area. The thought of using her legal bankruptcytraining on their own store was not amusing. But was it or shouldit be just about the money? They really enjoyed the jewelrybusiness and the relationships established with their clientele.Their faith had remained strong, but this was going to be a test,or was it an opportunity?

Required (Please show your work):

1. What risk factors should Bob bemost concerned about regarding his decision?

2. Identify possible ethical orvalues-based issues that could impact any decision.

3. What should Bob and Bonniedo?

Personal Financial Planning Mini-Case

Jeff and Mary Douglas, a couple in their mid-30s, have twochildren - Paul age 6 and Marcy age 7. The Douglas' do not havesubstantial assets and have not yet reached their peak earningyears. Jeff is a general manager of a jewelry manufacturer inProvidence, RI while Mary teaches at the local elementary school inthe town of Tiverton, RI. The family needs both incomes to meettheir normal living expenses and to meet unforeseen emergencypurchases. Their cash flow situation is tight and they have haddifficulty growing a "nest egg" through savings and investing.

Jeff and Mary have discussed the needs of their two children whoare typical, healthy, and active kids. They have discussed tryingto have Mary stay at home, be with the kids more and run thehousehold but her income is very much needed and she also wants acareer and doesn't want to put her teaching job on hold to be astay-at-home mother. Jeff also wants (and needs) to work and hisjob often requires long days - beyond the 9-5 grind.

Now that both children are in school there is no day care needand Mary's job schedule actually matches nicely with the children'sschedule so she not only wants to continue to work but is thinkingabout completing a graduate degree. Currently, Mary is able to takemost of the summer off from teaching (when the children are home onvacation) and so she enjoys a great deal of flexibility in thesummer and spends quite a bit of time with the children in thesummer.

Jeff is the breadwinner of the family but Mary's contribution isalso very significant. Jeff earns about 65% of the total householdincome with Mary earning the remainder. By completing a graduatedegree, Mary could increase her salary by at least 20% but shewould need to commit to a continuing education program at eitherProvidence College or URI.

Although their net worth is not substantial, they have bigdreams and aspirations. Their personal financial objectives includegoals that if achieved would provide a better life for theirchildren than both Jeff and Mary had growing up in working classfamilies in the Fall River and New Bedford areas. They want to helptheir children go to good colleges and Jeff and Mary want to haveassets that allow them (Jeff and Mary) live a comfortableretirement. Both are in excellent health and have family historiesof long life expectancies. Their retirements (at age 65 or so)could be a period of 20 or more years.

They own their home which has an assessed value of $200,000 anda market value of about $300,000 (as determined by a real estateappraiser based on recent sales of comparable homes in similarneighborhoods.) The mortgage on the home has a balance of $140,000.A review of the Douglas' financial information, bank statements,and other documents shows the following as of 6/1/18:

- 2011 Camry worth about $11,000, with a bank loan balance of$3,000

- 2012 Volvo S60 worth about $15,000, with a bank loan balanceof $10,000

- An insurance policy on Jeff's life with a face value of$100,000 and no cash surrender value. Mary is the beneficiarylisted on Jeff's policy.

- An insurance policy on Mary's life with a face value of$10,000 and no cash surrender value. Jeff is the beneficiary listedon Mary's policy.

- Credit card balances that total $3,500.

- A savings account with a $1,000 balance.

- Two mutual funds earmarked for the children's collegeeducation. The account for Paul has a balance of $10,000 andMarcy's has $11,000 as a current balance. The fund has averaged an8% annual rate of return over its life.

- 100 shares of Apple Inc. (NASDAQ: stock symbol = AAPL),formerly Apple Computer, Inc. You need to value this stock based onthe 1/2/18 price per share. You will need to find that on theInternet.

- 200 Shares of AT&T.

- 150 shares of Twitter.

- A checking account with a balance of $3,000.

- Jeff estimates that their furniture, fixtures etc. in the homeare worth about $7,000.

- Jeff and Mary have retirement accounts that have a currentmarket value of approximately $200,000.

- Mary still has an education loan with an outstanding balanceof $15,000. It still has seven years left on it.

- A vacation loan of $750 due in 6 months and a home improvementloan of $2,000 due in 2 years (unsecured - not a home equityloan.)

- Jeff wants to finish the basement and he has discussed this atlength with Mary. He is getting estimates from contractors based onideas that both he and Mary have to create a play area for thechildren and a TV/den for the family. Jeff and Mary love to playping pong and pool and would love to introduce the children to both"sports." He believes that the project will cost about $30,000 andhe is interested in tapping into the home equity.

- Jeff is also an avid baseball fan and is looking at buying amembership to a local baseball/softball facility for both Paul andMarcy. He figures that since he doesn't have any expensive hobbies,it would be fun to get Paul started as a baseball player and Marcyas a softball player. The membership costs and related costs are asfollows: $1,500 per year (covers both kids), equipment $500 peryear, and team registration and travel costs will be about another$1,000 to $2,000 a year depending on how serious the kids become.Mary is not sure that this is a priority at this point and wants toexplore this possibility in more detail.

General instructions: Please read through the questions below,compile your own answers and responses. I need to have you submityour solution (answers to the questions below) by attaching fileswithin the Assignment tab in myCourses (not CONNECT!).PLEASE DO NOT EMAIL ME YOUR SOLUTION AS IT MAY GET LOST INTHE HUNDREDS OF EMAILS I RECEIVE EACH WEEK. IT MAKES THINGS MUCHEASIER IF YOU SUBMIT VIA MYCOURSES. ALSO YOUR GRADE FOR THIS CASEWILL ALSO BE REPORTED IN MYCOURSES.

1. What is the family's net worth? Please attach support forthis with either an Excel or MS Word document to the PersonalFinance Case assignment tab in myCourses. Your Excel or MS Wordfile should clearly reveal the Balance Sheet for the DouglasFamily. Please produce it in good form - emulating what you see forexamples in the book. The balance sheet "as of date" should be6/1/18

2. What is the current ratio? (Use the formula from thebook)

3. What is the debt ratio?

4. Any comments about the family’s investment portfolio? Pleasekeep in mind that their investment portfolio currently consists ofcommon stocks. Their home is not considered part of theirinvestment portfolio. Strengths or weaknesses?

5. If the family's monthly living expenses are about $6,000,what is their liquidity ratio?

6. Jeff Douglas believes strongly that they should help fullyfund the equivalent of a state university education (4 years) forPaul and Marcy. Both sets of grandparents have volunteered to makea lump sum donation (50/50 spilt) to the mutual funds today. Inother words, these generous grandparents have stated that they arewilling to pool their funds and make a substantial deposit tosupport an education fund.

Assuming that today's cost of that type of college education is$25,000 per year and that it will inflate by 4% per year, how muchmust the grandparents donate to the mutual funds to fully fundthese investments (to meet Jeff's goal)? (Assume that Paul andMarcy will start college in 12 and 11 years respectively. You willneed to determine the present value of the future college costs. Ihave put a worksheet at the end of this document that you mightfind helpful. If you are an Excel user, you can set this up withinan Excel worksheet. Here are some steps to follow:

A. First by growing the cost of education by 4% per year (12years into the future for Paul and 11 years for Marcy) and thencalculating the present value of those future cash flows. Keep inmind that Paul will be going to school for 4 years and so too willMarcy. So you will need to figure the future value of the cost ofeducation for the first year, second year, third year, and fourthyear - each year 4% more costly than the year before!

B. Calculate the present value of the future costs of educationusing the investment yield prediction (8% - see below and notice inthe data above that the investment fund has averaged 8% peryear).

C. Once you have the present value of the future costs - you cansubtract the current balance in these accounts to derive the"donation" that the grandparents will need to make.) Assume thatthe investment will grow at 8% per year as a result of investmentyields. How much (in total) must the grandparents invest today toestablish the education fund for Paul and Marcy?

NOTE: There is more on how to approach solving requirement 6 atthe end of this document.

7. Calculate the percentage of net worth represented by the homeand the next two largest assets. Take into account any loansattributed to those assets so that you show the following - theasset’s net value/Total family net worth. Count both cars as oneasset (Automobiles).

This is called the “dominant” asset – other words, if a familyis “car rich” then that would mean a significant percentage oftheir wealth (as defined by net worth) would be from the value ofits cars. The cars would be the dominant asset. If the family’s networth is mostly from their retirement accounts, then we could saythat a significant amount of their wealth is from pensions.

8. Jeff is considering applying for a home equity loan tofinance the basement project. What is the maximum home equity loanthe Douglas' could possibly get based only on equity (and ignoringcash flow considerations)? Assume that a bank is willing to loan upto 80% of the value of the home (between the mortgage and the homeequity loan).

9. Home equity loans have many advantages. For example, the homeequity loan may be the source of funds to help Jeff and Mary finishtheir basement. The interest on the loan will be tax deductible.The arrangement that Jeff and Mary are looking at will involve a15-year payback period and would allow for them to draw down on anyunused funds in a credit line arrangement.

Please describe two disadvantages of a home equity loan andrecommend an amount that Jeff and Mary should request for theirline of credit.

10. In your textbook chapter on Life Insurance,read about "Determining Your Life Insurance Needs." Please use thefollowing methods: Easy Method (assume Jeff makes $70,000 per yearand Mary makes about $40,000), DINK method (even though they dohave two kids still use DINK to come up with an estimated amountand assume that funeral expenses will be $10,000 for Jeff and$10,000 for Mary.) and the "Family Need" method. Also, when usingthe DINK method, assume that "other debts" are 100% of the balancesfor the vacation, home improvement, and education loans.

For the Family Need method, use the samecalculations as shown the book example. Assume that living expensesare 70% of their income (you need this to estimate an emergencyfund). Be conservative and estimate an emergency fund of 6 monthsof living expenses. Keep in mind that when using the "Family Need"method, you have to run the analysis twice (see the bookexample) - once based on the what-if assumption that Jeffdies now and once based on the what-if assumption that Mary diesnow. Assume that the retirement account on the balance sheet is 90%Jeff's funds and 10% Mary's. Ignore social security death benefits.Also, the assumption should be that the Mutual Fund investmentshould not be considered as a liquid asset because it is earmarkedfor the children's education.

What do you recommend for death benefit amounts for each person(Jeff and Mary)? Please write a paragraph or two mentioning theamount of life insurance each needs and why you chose the amountyou did.

11. Pretend you are a personal financial planning professionalattempting to devise a comprehensive personal financial plan forJeff and Mary. What other areas of Jeff and Mary's personalfinancial situation should be examined? Please mention at least 2other concepts that they should take a careful look at. Pleasewrite a few paragraphs that answer this question. Feel free to poseadditional questions that you would like to ask Jeff and Mary as away of making sure you, as a financial planner, understand theirsituation.

_________________________________________________________________

Requirement 6 of the Douglas Personal Financial PlanningCase

These steps and the worksheet below might help you solverequirement 6. I find it easier to set this type of thing up withinan Excel worksheet and I like to utilize the FV and PV functions ofExcel. However, you can also do this with the time value of moneytables within the text or with a financial calculator. It’s up toyou. In any event, please show your work - how you derived yourfinal answer.

1. First step involves growing the cost of education by 4% peryear (12 years into the future for Paul and 11 years for Marcy) andthen finding the present value of those future costs by assuming an8% annual return. So here's what you need to do. Set upa table like these for both kids:

(GO TO NEXT PAGE)

Paul's projections

Years (end of year)

Future Value of Education Cost (4%)

Present value of Education Costs (using 8% as the discountrate)

12

$40,026

$15,894.80

13

$41,627

$$15,306.10

14

$43,292

$14,739.21

15

$45,024

$14,193.31

Total

$60,133.42

Marcy's projections

Years (end of year)

Future Value of Education Cost (4%)

Present value of Education Costs (using 8% as the discountrate)

11

12

13

14

Total

$

Once you have the present value of the future costs - you cansubtract the current balance in the current education accounts toderive the "donation" that the grandparents will need to make.) Howmuch (in total) must the grandparents invest today to establish theeducation fund for Paul and Marcy? Use the following formula:

Total present value of the education costs less the $21,000 inthe current education accounts = the donation that the grandparentswill make.

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