Reference no: EM133071595

Question 1

(a) Luke and Monica are proud parents of baby Lily who is 2 years old. They want to send Lily to Presbyterian Ladies" College (PLC), a prestigious private girl school, when Lily enters secondary college. They estimate that to fully ?md the cost of Lily's secondary education they will need to have $120,000 at the time Lily is 13 years old. They currently have $10,000 in an education fund for Lily which will be invested at 8% per annum until she reaches 13. They also intend to make monthly contributions into an investment account that pays 12% per annum (i.e 1% per month) with annual compounding. What is the monthly contribution if they were to achieve their saving objective of $120,000 when Lily is 13 years old?

(b) James Holloway has just won a television game show. There are two ways in which James can receive his price: Option 1: a once-off payment of $65,000 in 12 months Option 2: a payment of $5000 a month for 12 months with the payment increasing by 0.5% every month. Assuming that the monthly discount rate is 1.5% and that interest rate compounds monthly, which option is ?nancially better for James?