Question

Gina has $5,000 saved and wants to attend a college with a current tuition of $10,000 a year. She will graduate from high school in five years. Roughly how much more will Gina need to save for one year's tuition to account for an annual rate of inflation of 3%?

a) $5,300.00
b) $6,255.00
c) $6,590.00
d) $9,000.00

Answer 1

To account for a 3% annual inflation rate over five years, Gina would need to save an additional $6,590.00 for one year's tuition, beyond the $5,000 she already has saved.

Step-by-step explanation:

The question deals with the concept of inflation and how it affects the cost of college tuition over time. To find out how much more Gina needs to save for one year's tuition five years from now, accounting for a 3% annual rate of inflation, we use the future value formula for inflation:

Future Value = Present Value * (1 + Inflation Rate)^Number of Years

Here, the present value (PV) is $10,000, the inflation rate (i) is 3% or 0.03, and the number of years (n) is 5.

Future Value = $10,000 * (1 + 0.03)^5

Calculating this gives:

Future Value = $10,000 * (1.03)^5 = $10,000 * 1.159274 = $11,592.74

Since Gina has already saved $5,000, the additional amount she needs to save is:

Additional Amount Needed = Future Value - Current Savings

Additional Amount Needed = $11,592.74 - $5,000 = $6,592.74

Rounded to the nearest dollar, this is approximately $6,590.00, which matches option c).