Question

Stephanie wanted to save for her daughter's education. Tuition costs $10,000 per year in today's dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 4 years. Stephanie can earn 12% on her investments and tuition inflation is 6%. How much must Stephanie save at the beginning of each year if she wants to make her last savings payment at the beginning of her daughter's first year of college

Answer 1

The amount that Stephanie must save at the beginning of each year if she wants to make her last savings payment at the beginning of her daughter's first year of college is:

= $6,428.46.

Step-by-step explanation:

a) Data and Calculations:

Tuition costs per year in today's dollars = $10,000

Total tuition costs for 4 years in today's dollars = $40,000

Number of periods to save = 18 years

Interest rate on investments = 12%

Tuition inflation rate = 6%

Stephanie needs to save $6,428.46 at the beginning of each year, calculated as follows from an online financial calculator:

N (# of periods) 18

I/Y (Interest per year) 18

PV (Present Value) 40000

FV (Future Value) 0

Results

PMT = $6,428.46

Sum of all periodic payments = $115,712.21

Total Interest = $75,712.21