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

nism-series-xb-education-cost-inflation-escalation-15-percent[ INVESTMENT ADVISER (LEVEL 2) ]

In Case 2, Mr. Y needs to fund his son's 2-year post-graduate education starting in Year 5. Current cost is Rs. 15,00,000 p.a. to be incurred at the end of Year 5 and end of Year 6. Education inflation is 15% p.a. What are the escalated costs at the end of Year 5 and Year 6 respectively?

[ A ]Year 5: Rs. 26,25,000; Year 6: Rs. 28,50,000

[ B ]Year 5: Rs. 33,50,000; Year 6: Rs. 38,50,000

[ C ]Year 5: Rs. 24,11,714; Year 6: Rs. 27,73,471

[ D ]Year 5: Rs. 30,17,036; Year 6: Rs. 34,69,591[ CORRECT ]

Takeaway

Compounding Rs. 15,00,000 at 15% education inflation gives escalated costs of Rs. 30,17,036 at the end of Year 5 and Rs. 34,69,591 at the end of Year 6, so option D is correct.

Derivation

Year 5 cost = Rs. 15,00,000 x (1.15)^5 = Rs. 15,00,000 x 2.011357 = Rs. 30,17,036 (rounded). Year 6 cost = Rs. 15,00,000 x (1.15)^6 = Rs. 15,00,000 x 2.313061 = Rs. 34,69,591 (rounded). The question checks that a candidate applies compound, not simple, escalation and uses the correct exponent for each year — 5 and 6 respectively, counted from today rather than from the start of the planning period, which is where most distractor errors originate.

Why the others fail

A — Year 5: Rs. 26,25,000; Year 6: Rs. 28,50,000

Calculated using simple linear inflation (15L + 15L x 15% x 5 = 26.25L), which ignores compound growth and understates both years' costs.

B — Year 5: Rs. 33,50,000; Year 6: Rs. 38,50,000

Calculated using an inflated 18% compounding rate instead of the stated 15% education inflation, overstating both figures.

C — Year 5: Rs. 24,11,714; Year 6: Rs. 27,73,471

Calculated using a 10% inflation rate (15L x 1.10^5 = 24.12L), confusing the 15% education inflation assumption with a lower general or marriage inflation rate.