A father wants to save for his 8-year-old son\'s college expenses. The son will

Question

A father wants to save for his 8-year-old son's college expenses. The son will enter college 10 years from now. An annual amount of dollar 40, 000 in constant dollars will be required to support the son's college expenses for 7 years. Assume that these college payments will be made at the beginning of the school year. The average inflation rate is estimated to be 6 percentage year, and the market interest rate on the savings accounts is 8 percentage. What is the equivalent annual equal payments to be made by the father over the 10 years to support his child's education? Evaluate the following projects as required:

Explanation / Answer

Answer: Period Amount inflation Amount required after inflation (Future value) Discounting rate Presen value (future value*interest discounting rate) 10 40000 0.56 71634 0.4632 33180 11 40000 0.53 75932 0.4289 32566 12 40000 0.50 80488 0.3971 31963 13 40000 0.47 85317 0.3677 31371 Total 129080 Equilient annual payment required to made by father over the 10yrs =Present value/PVAF i.e 129080/7.25 =17812 Period PVF 0 1.00 1 0.93 2 0.86 3 0.79 4 0.74 5 0.68 6 0.63 7 0.58 8 0.54 9 0.50 Presnt value of annuity factor 7.25

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