Question
A father is planning a savings program to put his daughter through college. His daughter is now 8 years old; today is her birthday. She
A father is planning a savings program to put his daughter through college. His daughter is now 8 years old; today is her birthday. She plans to enroll at the university in 10 years, and she will enroll on her 18th birthday. It should take her 4 years to complete her education. Currently, the cost for college per year (for everything - food, clothing, tuition, books, transportation, and so forth) is $40,000, but a 5 percent annual inflation rate in these costs is forecasted (inflation hint: if a price is $100 today, with 5% inflation, in one year the price will be 100*(1+0.05), in 2 years 100*(1+0.05)^2, and so on). Assume that all college expenses (tuition, books, etc.) need to be paid at the beginning of the year. The daughter recently received $15,000 from her grandfather's estate; this money will be invested in an investment account paying 8 percent (annual) interest compounded annually. This money will be used to help meet the costs of the daughter's education. The money will bedeposited in the investment account on her 8th birthday. The rest of the cost of college will be met by money the father will be depositing in the same investment account. He will make equal, annual deposits to the account in each year from his daughter's 9th birthday up to and including the day his daughter starts college. (Ignore taxes throughout the problem).Draw the timeline.
Hint: Since the cost of tuition is not constant you cannot use the annuity formula. You need to find the PV value of each of the payments on her 18th birthday and add them together to know how much money the father needs.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started