Question

You are saving for your child’s college education. Tuition will be $30,000 each year for four years, with the first tuition payment due 18 years from today. • How much do you need to deposit today in a bank account that earns 6% annual interest from now through the end of your child’s college education so that you will have enough money to meet all the tuition payments?

Answer 1

We will answer the question by breaking it up in 2 parts.

In the first part we would calculate the value of $30000 yearly at the start of education (i.e 18 years later),by discounting it at 6% yearly.(We could have used the present value of annuity due formula, at 6% and 4 years, but this method will help to explain this better)

Year Number	Value of fees at the start of year 1
1	$30000
2
3
4
Total Funds needed at the start of year 1	=$30000+$28302+$26700+$25189=$110191

In part 2, we will use the valus we got in part 1 and discount it down at 6% for 18 years using the following formula,

where,

r=rate of interest

n=number of years

here,

He needs to deposit $38605 today.

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