Question

Use the data below to calculate how much the family must save each month from today (2020) until the child starts college (assuming the child will begin college at age 18) in order to have a college saving fund significant to pay for the child’s college education. You need to take into consideration the college tuition inflation rate (how much tuition cost increase each year), how long the child will be in college, and the family’s savings rate.

Must Include in Answer:

• The timeline of the cash flows associated with the calculation
• A detailed narrative of the various TVM calculations you had to make to derive the ultimate monthly savings amount. This narrative must include all financial calculator inputs or TVM equations and calculations.

Family Name: Monroe

Child Name: Sebastian

Current Age: 10

Average Annual College Tuition, Room & Board, Textbook Cost, etc. in 2020: $12,720.00

College Inflation Rate: 6:00%

Years Expected to be in College: 2

Family Savings Rate: 8.50%

Answer 1

Current fees = 12720

Inflation rate of fees = 6%

The current age of child = 10 years

At the age of 18, he will be enrolled in college. So savings will be done for 8 years and the future requirement of fund = Current fees*(1+inflation rate)^8 = 12720*(1+0.06)^8 = 20273.74751

Family savings rate = 8.5%

So it is an annuity problem where monthly let say A amount is deposited at a rate of (=8.5/12 = 0.708%) for 96 months to have a future value of 20273.74751

FV formula of an annuity is:

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

=> 20273.74751 = A*{(1.00708)^96 - 1}/0.00708

=> A = 148.176