Question
A couple wants to save for their 3-year old daughters college expenses. The daughter will enter college exactly 16 years from now. An annual amount
A couple wants to save for their 3-year old daughters college expenses. The daughter will enter college exactly 16 years from now. An annual amount of $60,000 in todays (Year-0s dollars) will be required to support the daughters college expenses. Assume that payments are made at the beginning of each school year, and that the daughter will spend 4 years in college. Further, assume that actual/then-current college expenses increase at a rate that is tied to the general inflation rate of 6.796% per year, and the couples market/nominal interest rate on savings is 10% per year. Given this information:
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What is the amount that the couple will pay for the 1st year of college in actual/then- current dollars?
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What is the present value of the total college expenses for all 4 years?
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If the couple wishes to fund the expenses with 16 annual deposits, what is the equal amount, in actual/then-current dollars, that the couple must save each year until their daughter goes to college?
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Because child care expenses are significant, the couple is also considering a schedule where only $10,000, in actual/then-current dollars, are deposited into the college fund each of the first 6 years. The remaining 10 deposits, in years 7 through 16, are such that the difference between deposits in consecutive years is constant. Find the value of the constant difference.
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