Your younger sister, Linda, will start college in five years. She has just infor
ID: 2621259 • Letter: Y
Question
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 $43,000 per year for four years (cost assumed to come at the end of each year). Anticipating Linda’s ambitions, your parents started investing $6,300 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 for the next five years in addition to the $6,300 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. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Additional annual savings required:
Explanation / Answer
Present value of annuity of college costs = $43,000*PVIFA (9%, 4)
= 43,000*3.2397
= $139,307.10
Accumulation based on investing $6300 per year for 10 years = 6300*FVIFA (9%,10)
= 6300*15.1929
= $95,715.27
Additional funds required = 139307.10 - 95715.27 = $43,591.83
Thus additional funds required = 43591.83/FVIFA (9%, 5)
= 43591.83/5.9847
= $7,283.88
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.