You have two daughters, born two years apart. The difficulty of putting away mon

Question

You have two daughters, born two years apart. The difficulty of putting away money for their college educations precludes you from saving on a continuous basis for both. After reviewing your financial condition and projections, you think that the best you can do is to put away $2,500/year for 10 years for daughter #2. After that time daughter #1 will begin college and your surplus cash flow will be devoted to paying her tuition and rooming costs, leaving nothing to put aside for daughter #2, who will start college 2 years later. Assuming a 7% average return over this entire period, how much will you be able to pay annually for each of daughter #2

Explanation / Answer

Plug into calculator:
Number of periods = 10
Interest rate = 7%
Present value = 0
Payment = -2,500
End of period - Ordinary Annuity
Solve for future value and get 34541.12

At the end of 10 years when the first daughter enters college, there will be 34541.12 for the second daughter.

In two years, 34541.12 will be worth:
34541.12*(1.07^2)= 39546.13, when daughter #2 enters college.

To find out how much this will pay annualy, plug into calculator:
Number of periods = 4
Interest rate = 7%
Present value = 39546.13
Future vaue = 0
Beginning of period - annuity due
Solve for payment and get: 10,911.34

Answer: 10,911.34 per year

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