A father, concerned about the rapidly rising cost of a college education, is pla
ID: 2382437 • Letter: A
Question
A father, concerned about the rapidly rising cost of a college education, is planning a savings program to put his daughter through college. She is 10 years old, plans to enroll at the university 8 years from now, and should take 4 years to complete her education. Currently, the cost per year (for everything-food, clothing, tuition, books, transportation, and so forth) is $10,000, but an 5 percent annual inflation rate in these costs is forecasted. The father's bank account pays 3 percent interest rate, compounded annually. How much will the father have to save each year before the time his daughter starts college in order to put her through school? (Note: The first deposit occurs one year from today, and the last deposit occurs when his daughter attends college at the age of 18.)
Explanation / Answer
Total Amount Needed at Year 18 = 10000 + 10000*1.05/1.03 + 10000*1.05^2/1.03^2 + 10000*1.05^3/1.03^3
Total Amount Needed at Year 18 = $ 41,180.20
Annual Saving by her father = pmt(rate,nper,pv,fv)
Annual Saving by her father = pmt(3%,8,0,41180.20)
Annual Saving by her father = $ 4630.98
Answer
Annual Deposit or Saving = $ 4630.98
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