Archive / Investment Adviser (Level 2) / Miscellaneous Aspects of Retirement Planning

nism-series-xb-five-year-compound-inflation-factor-education-goal[ INVESTMENT ADVISER (LEVEL 2) ]

In Case 2, son's post-graduate education currently costs Rs. 15,00,000 p.a. and inflation is 15% p.a. What is the 5-year compounding factor and the resulting Year 5 cost?

[ A ]Factor = 1.750000; Cost = Rs. 26,25,000

[ B ]Factor = 2.313061; Cost = Rs. 34,69,591

[ C ]Factor = 1.610510; Cost = Rs. 24,15,765

[ D ]Factor = 2.011358; Cost = Rs. 30,17,036[ CORRECT ]

Takeaway

The 5-year compounding factor for 15% education inflation is 2.011358, giving a Year 5 education cost of Rs. 30,17,036, so option D is correct.

Derivation

Compounding factor = (1 + 0.15)^5 = 2.0113571875. Year 5 cost = Rs. 15,00,000 x 2.0113571875 = Rs. 30,17,035.78, rounding to Rs. 30,17,036. This pairs the correct compounding factor with the correct resulting rupee cost, testing whether a candidate can verify both the multiplier and the final figure together rather than getting one right and the other wrong — the wrong options mix in factors and costs belonging to different rates or tenures used elsewhere in Case 2.

Why the others fail

A — Factor = 1.750000; Cost = Rs. 26,25,000

This uses a simple linear-growth factor (1 + 5 x 0.15) instead of compound growth, understating both the multiplier and the resulting cost.

B — Factor = 2.313061; Cost = Rs. 34,69,591

This is the Year 6 compounding factor and cost (1.15^6), one year beyond the requested Year 5 figure.

C — Factor = 1.610510; Cost = Rs. 24,15,765

This is the compounding factor for 10% over 5 years (1.10^5), applying the wrong inflation rate rather than the stated 15% education inflation.