Question
Michael Jones is saving for his son's college tuition. His son is currently 11 years old and will begin college in seven years. Michael has
Michael Jones is saving for his son's college tuition. His son is currently 11 years old and will begin college in seven years. Michael has an index fund investment worth $6,890 that is earning 9.5 percent annually. Total expenses at the University of Maryland, where his son says he plans to go, currently total $14,100 per year, but are expected to grow at roughly 6 percent each year. Michael plans to invest in a mutual fund that will earn 11 percent annually to make up the difference between the college expenses and his current savings. In total, Michael will make seven equal investments with the first starting today and the last being made a year before his son begins college.
- What will be the present value of the four years of college expenses at the time that Michael's son starts college? Assume a discount rate of 5.5 percent.
- What will be the value of the index mutual fund when his son just starts college?
- What is the amount that Michael will have to have saved when his son turns 18 if Michael plans to cover all of his sons college expenses?
- How much will Michael have to invest every year in order to have enough funds to cover all his sons expense?
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