Question

A couple wants to save for their daughter's college expense. The daughter will enter college 8 years from now and she will need $25,000 in today's dollars for each of the 4 school years. Assume that these college payments will be made at be 6% per year and the annual inflation free intrest rate is 5% what is the equal amount in actual dollars, the couple must save each year to afford that (for 8years starting now)?

A. SAR 16,125
B. SAR 11,117
C. SAR 6,428
D. SAR 13,500

Answer 1

To afford their daughter's college expenses, the couple must save $4,689.12 each year in actual dollars.

Step-by-step explanation:

To find the equal amount in actual dollars that the couple must save each year to afford their daughter's college expenses, we need to take into account the annual inflation rate of 5% and the annual interest rate of 6%.

Let's break down the calculation:

1. First, we need to calculate the future value of the college expenses in 8 years. Using the formula for compound interest, we have: $25,000 × (1 + 0.05)⁸ = $32,986.52
2. Next, we need to calculate the equal amount the couple must save each year to accumulate that amount in 8 years. Using the formula for present value of an annuity, we have: $32,986.52 / [(1 + 0.06)⁸⁻¹] = $4,689.12

Therefore, the couple must save $4,689.12 each year in actual dollars to afford their daughter's college expenses.