Paul Murray would soon graduate from business school with his MBA. He had accepted a fine job offer. Paul's wife, Nancy, was an attorney with a local firm specializing in corporate law. Paul and Nancy were expecting their first child a few months after Paul's graduation. With the experience of paying for their own graduate educations fresh in their minds, Paul and Nancy recognized that they would have to plan early to accumulate enough money to send their child through four years of college.
Questions
1. In the recent past, college fees had been increasing at about 8 percent per year. Because this rate of increase exceeded the general inflation rate, Paul and Nancy felt it would decline to a level closer to measures of general inflation, such as the Consumer Price Index. Thus, they decided to assume that college fees would increase 6 percent per year. At this rate, how much will one year of college cost 18 years from this fall?
2. Assume the Murrays want to accumulate a fund equal to four times the first year's tuition by the end of year 18. Assume further that they make a single payment into this fund at the end of each year, including the 18th year. How much would they have to contribute to this fund each year, assuming that their investments earn 6 percent per year?
3. How would their annual contributions differ if their investments earned 8 percent? 10 percent? 4 percent?