Hi all,
I am really struggling with the solution approaches to TVM from the Schweser QBank, it appears to me that their solutions are not consistent with what the official guide suggests.
I have an example of two very similar questions. No. 1 from the Official guide (Reading 6, Practice Problem 8)
A client plans to send a child to college for four years starting 18 years from now. Having set aside money for tuition, she decides to plan for room and board also. She estimates these costs at $20,000 per year, payable at the beginning of each year, by the time her child goes to college. If she starts next year and makes 17 payments into a savings account paying 5 percent annually, what annual payments must she make?
Solution approach
- First PV at t=17
- PMT = 20,000
- N=4
- I/Y=5
- CPT PV= 70,919
- Then PV = FV at t =17
- N=17
- I/Y=5
- FV=70,919
- CPT PMT=2,745 → Correct (and makes sense to me)
Next problem from Kaplan Schweser QBank (ID 1203914)
Natalie Brunswick, neurosurgeon at a large U.S. university, was recently granted permission to take an 18-month sabbatical that will begin one year from today. During the sabbatical, Brunswick will need $2,500 at the beginning of each month for living expenses that month. Her financial planner estimates that she will earn an annual rate of 9% over the next year on any money she saves. The annual rate of return during her sabbatical term will likely increase to 10%. At the end of each month during the year before the sabbatical, Brunswick should save approximately:
Following the previous approach
- PV at t=11
- PMT=2,500
- I/Y = 10/12
- N=18
- CPT PV=41,627
- PV = FV at t= 11
- FV=41,627
- N=11
- I/Y=9/12
- CPT Payment = 3,645 → should be 3,356 and I cannot figure out why my approach is wrong
I do follow that we can also calculate the value of an annuity due at t=12 (which is how they did it), but I do not follow why we can then take an ordinary annuity with N=12. Should this not be the exact same approach as above? Am I missing anything?
Thanks for any advice!