1.Tuition costs for a student are expected to inflate at the rate of 8 percent p

Question

1.Tuition costs for a student are expected to inflate at the rate of 8 percent per year. To prepare enough money for the tuition costs for the next four years, a student plans to set up a savings account. The first year's tuition of $2,000 is due one year from now. Assuming that the savings account has an interest rate of 5%, the amount of money that the student needs to deposit in the savings account now is closest to:

2. Receipts from an investment will be $1,000 at the end of the first year and decline by $150 each year for 5 years thereafter. Assuming that the interest rate is 7%, the equivalent constant annual investment receipt amount is closest to:

Explanation / Answer

(1)

Required present value ($) = 2,000 x P/A(5%, 4) = 2,000 x 3.5460** = 7,092

(2)

First, we compute Present Worth (PW) of investment as follows. Note that PV Factor in year N = (1.07)-N

Equivalent annual investment = PW / P/A(7%, 5) = $3,119.78 / 4.7665** = $654.22

**From P/A and P/F Factor tables

Year Investment ($) PV Factor @7% Discounted Investment ($) (A) (B) (A) x (B) 1 1,000 0.9346 934.58 2 850 0.8734 742.42 3 700 0.8163 571.41 4 550 0.7629 419.59 5 400 0.7130 285.19 6 250 0.6663 166.59 PW ($) = 3,119.78

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