Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton University, which will cost $39,000 per year for four years (cost assumed to come at the end of each year). Anticipating Lindas ambitions, your parents started investing $5,900 per year five years ago and will continue to do so for five more years. Use 9 percent as the appropriate interest rate throughout this problem (for discounting or compounding). How much will your parents have to save each year (A?) for the next five years in addition to the $5,900 they are currently saving to have the necessary funds for Linda's education? Use Appendix C and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods

Solution:

Present value of college costs PVa=A*PVifa (9%, 4 periods)

=39000*3.240 = 126360

Accumulation based on investing $5,900 per year for 10 years.

FVa= A*FVifa (9%, 10 periods)

= 5900*15.193 =89638.7

Additional funds required 5 years from now.

$126,360 PV of college costs

89,638.7 Accumulation based on $5,900 per year investment

Subtract PV and FV =$36,721.3

Additional funds required Added contribution for the next 5 years

A= FVa/FVifa (9%, 5 periods)

=36,721.3/5.985

=6,135.555 (round up to 6,135.56).