Question
3) Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay
3) Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. The couple expects tuition, books and living expenses to cost $60,000 per year in their child's first year, and to increase at 4% per year for four years. Assume college payments are made at the end the year (i.e. the freshman payment is made at the end of freshman year, etc.) and that the baby will start college on her 18th birthday.
a) Assuming college savings are invested in an account paying 7% interest, then what is the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education if the parents don't want to save any more after her 18th birthday?
b) The couple plans to start saving at the end of the year (i.e. on the child's first birthday) and to save through the 18th birthday. How much do they need to save every year to have enough money in 18 years to pay for college? (they will not save any more after the 18th birthday)
c) If the couple plans to make one savings deposit every TWO years, starting on the child's second birthday and ending on her 18th birthday, how much will they need to save every two years?
4) Suppose you expect to rent a house when you retire in 35 years. Today, rent for a 3 bedroom, 2 bathroom home costs $36,000 per year. You expect inflation to be 2% per year between now and when you die and that rent will adjust every year with inflation. Assume rent is paid at the beginning of the year and that you earn a return of 6% on savings.
a) How much will rent cost in your first year of retirement if you want to rent a 3 bedroom and 2 bathroom home?
b) How much will you need to have saved by the time you retire in order to pay for rent for the entire time you are retired? (Assume you expect to live for 30 years after retiring and won't save any more money in that time)
c) If you make $125,000 per year after tax while working, what percentage of y
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