You are saving for the college education of your four children. They are one yea

Question

You are saving for the college education of your four children. They are one year apart in age; one will begin college in 8 years (Year 8), another in 9 years, another in 10 years and the last one in 11 years. You estimate your children’s college expenses to be $10,000 per year per child, paid at the beginning of each college year (first payment for first child is at Year 8 and so on). The annual interest rate is 6 percent. How much money must you deposit in an account each year to fund your children’s education? You will begin payments one year from today. You will make your last deposit when your oldest child enters college. Also assume that each child will take 4 years to graduate from college.

Explanation / Answer

Dear Friend, Please find the following answer for the given question. Explanation to Following table:- Col 1 CHILDREN AGE- From 1 to 14 years .** 4 the child will study in college from 11th year to 14th year that’s why we have taken child age up to 14 years only there after, there is no requirement of money. Col 2 Income is required at the beginning of children age that means requirement is at the ending of 1 year before than children age i.e., if amount is required for children at 8th year , the amount requirement is 7th year ending. Col 3 is calculation of how many children's are going to college at respective years . It is required for calculation of how much cash outflow at the respective years. Col 4 is actual amount requirement on the basis col 3 @ 10,000 per year per Child. Col 5 Discount factors @ 6% disc rate in order to calculate the present value of cash outflow Clo 6 is the multiplication of Col 4 and 5 to get the present value of cash outflow at respective years. Children Age Income requirement year NO.of children going to school Amount requirement @10,000 per year per child Disc factor Present value of investment 1 0 year ending 0 0 1 2 1 year ending 0 0 0.943396 0 3 2 year ending 0 0 0.889996 0 4 3 year ending 0 0 0.839619 0 5 4 year ending 0 0 0.792094 0 6 5 year ending 0 0 0.747258 0 7 6 year ending 0 0 0.704961 0 8 7 year ending 1 Child 10000 0.665057 6650.57 9 8 year ending 1,2 Children 20000 0.627412 12548.24 10 9 year ending 1,2,3 Children 30000 0.591898 17756.95 11 10 year ending 1,2,3,4 children 40000 0.558395 22335.79 12 11 year ending 2,3,4 children 30000 0.526788 15803.62 13 12 year ending 3,4 Children 20000 0.496969 9939.38 14 13 year ending 4 Children 10000 0.468839 4688.39 89,722.97$ Therefore, Father has required Rs.89722.97/- over a period of 7 years. Yearly amount of investment = (Required investment) / (Cumulative annuity factor) Cumulative annuity factor at @ 6 disc rate for 7 years = 5.582 Therefore, Investment requirement by father evrry year = 89722.97/5.582 = 16,073.62$

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.