Question

Stephanie wants to save for her daughter's education. Tuition costs $12,000 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 5 years. Stephanie can earn 12% on her investments and tuition inflation is 6%. How much must Stephanie save at the end 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

Annual deposit= $3,463.37

Step-by-step explanation:

Giving the following information:

Tuition costs $12,000 per year in today's dollars.

Number of years= 18

She will go to school for 5 years.

Stephanie can earn 12% on her investments and tuition inflation is 6%.

First, we need to calculate the cost of each year and the total cost.

FV= PV*(1+i)^n

Year 1= 12,000*1.06^18= 34,252.07

Year 2= 34,252.07*1.06= 36,307.12

Year 3= 38,485.55

Year 4= 40,794.68

Year 5= 43,242.36

Total= 193,081.78

Now, we can determine the annual deposit required:

FV= {A*[(1+i)^n-1]}/i

A= annual deposit

Isolating A:

A= (FV*i)/{[(1+i)^n]-1}

A= (193,081.78*0.12) / [1.12^18)-1]

A= 3,463.37