Jane and her husband have just had a baby girl and have started to plan for her

ID: 2797401 • Letter: J

Question

Jane and her husband have just had a baby girl and

have started to plan for her college education. Suppose that

they estimate that in order to fully fund the little girl’s college

education they will need to have saved $100,000 in year 2008

dollars by the time she is 18 (i.e., in 18 years). Furthermore,

they believe that they can achieve an average return on their

investments of 8%/year.

How much will Jane and her husband have to save per year for the

next 18 years in order to have saved the $100,000 in year 2008

dollars? Assume that the average annual inflation rate will be

3%/year over the next 18 years. Note that your answer must be

expressed in

actual

dollars per year.

The answer is $4,546. How do I get there?

Amount to be accumulated in 18 years

FV = 100000*(1+0.03)^18 = 170243.3061

This is the amount to be accumulated in 18 years

FV of annuity = P*[((1+r)^n - 1)/r]
P - Periodic payment = ?
r - rate per period = 0.08
n - number of periods = 18

170243.3061 = P*(((1+0.08)^18 - 1)/0.08)

P = 4545.85 = $4546

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