A young couple is planning for the education of their two children. They plan to

Question

A young couple is planning for the education of their two children. They plan to invest the same amount of money at the end of each of the next 16 years,i.e.,the first contribution will be made at the end of the year and the final contribution will be made at the time the oldest child enter college. The money will be invested in securities that are certain to earn a return of 8 percent each year. The oldest child will begin college in 16 years and the second child will begin college in 18 years. The parents anticipate college costs of $25,000 a year (per child). These costs must be paid at the end of each year. If each child takes four years to complete their college degrees, then how much money must the couple save each year?

Explanation / Answer

Calculating the payment amount each year using excel sheet: If it costs $25,000 per each child then for 4 years it will take $100,000($25,000 * 4) for completing their college degrees. For the oldest child, the college will begin in 16 years and the second child the college will begin in 18 years. Calculating the amount to be deposited each year for the oldest child. Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PMT" function as we are finding the amount of deposit in this case. Step3: Enter the values as Rate = 8%; Nper = 16; PV = 0; FV = -100000 Step4: Click "OK" to get the desired value. The value comes to "3,298" Therefore, they must deposit $3,298 each year for their oldest child. Calculating the amount to be deposited each year for the second child: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PMT" function as we are finding the amount of deposit in this case. Step3: Enter the values as Rate = 8%; Nper = 18; PV = 0; FV = -100000 Step4: Click "OK" to get the desired value. The value comes to "$2,670" Therefore, they must deposit $2,670 each year for their second child.

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