Question

A young couple is planning for the education of their two children. They plan to invest the same amount of money at the end of each of the next 16 years. The first contribution will be made at the end of the year and the final contribution will be made at the end of the year the older child enters college. The money will be invested in securities that are certain to earn a return of 8% each year. The older child will begin college in 16 years and the second child will begin college in 18 years. The parents anticipate college costs of $25,000 a year (per child). These costs must be paid at the end of each year. If each child takes four years to complete their college degrees, then how much money must the couple save each year

Answer 1

The couple must save $ 6,598 each year

Step-by-step explanation:

Calculating the payment amount:

Cost per year = $25,000 per each child

Cost for 4 years = $25,000 × 4 = $100,000

For the oldest child, the college will begin in 16 years and the second child the college will begin in 18 years.

Calculating the amount to be deposited each year for the oldest child.

Using Microsoft Excel PMT function

Rate = 8%

N = 16

PV = 0

FV = -100000

= $3,298

Therefore, they must deposit $3,298 each year for their oldest child.

Calculating the amount to be deposited each year for the second child:

Using Microsoft Excel PMT function

Rate = 8%

N = 18

PV = 0

FV = -100000

= $2,670

Therefore, they must deposit $2,670 each year for their second child.

Total sum to be saved per year = $3,298 + $2,670 = $6,598