Sandra and Michael Wilson are the parents of Rory who justturned 5 years old (coincidentally on the same date that primary,secondary and university academic years commence). They own afour-bedroom home in Edinburgh. Sandra is a partner in a localdental practice and Michael is a stay at home dad. Sandra earns£100,000 a year (after tax).

Now that Rory is starting primary school, thoughts have turnedto saving for his education. Rory is enrolled to attend a state(i.e. non fee-paying) primary school. The Wilsons plan to send Roryto a private secondary school (when he turns 11). The school isprestigious and its fees are set accordingly. Currently tuition is£20,000 per school year and are projected to rise at the rate ofinflation. Currently around 2% per annum.

The Wilsons hope that Rory will subsequently attend their almamater, Oxford University when he turns 18. Most undergraduatecourses at Oxford have a four academic year duration. Undergraduatefees at Oxford are currently £9250 per annum and are projected torise faster than inflation, at a rate of 4% per annum. In addition,as Rory would be living away from home if he attended Oxford, hisparents envisage that his living costs (primarily studentaccommodation and food) would amount to £10,000 per annum(expressed in today’s prices). These living costs are projected toincrease at the rate of inflation, 2% per annum.

Using a discount rate of 7%, what is the present value of thecombined projected spend on Rory’s private school fees, universitytuition and living costs? (Assume that all fees and living costsare incurred at the beginning of each academic year e.g. Rory’sfirst school fee invoice will arrive in exactly 6 years whichcoincides with his first day at secondary school when he turns11).

The Wilsons plan to fund the expenditure on private school feesfrom Sandra’s income. They would however like to start investingtoday in a fund that would be used to pay Rory’s university feesand living costs. They would like to make an equal annual paymentinto that fund every year (starting in one years’ time) with a viewto accumulating £120,000 by Rory’s 18th birthday. This £120,000would then be drawn down over Rory’s time at Oxford to meetexpenses as they come due.

How much money would they have to deposit into the fund everyyear (with the first payment one year from now) to meet that targetassuming a conservative fund return estimate of 3% a year. Will theaccumulated amount be enough to cover the joint fees and livingcosts during Rory’s time at Oxford?