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Suzanna plans to save for her 4-year school, which starts 6 years from now. Suzanna will...

Suzanna plans to save for her 4-year school, which starts 6 years from now. Suzanna will need to make the first payment 6 years from today. She identifies a savings plan that allows her to earn an interest of 8 percent annually. The current annual expenditure is $7,200 and it is expected to grow by 7 percent annually. How much should Suzanna deposit each year, starting one year from today? Assume that she plans to make 4 payments.

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Answer #1

If the current school expenses is $ 7200, then in 6 years, the school expenses will be

The annual expenditure for the school in year 6 will be $10805.3 and will increase by 7% for the remaining 3 years.

The size of the expenditure is found using the present value of growing annuity equation

Size of the college expenditure = $ 26,298.6

The college expenditure is worth $26,298.6 in 6 years. In four years, its worth is calculated as follows

In four years, the college expenditure is worth = $26,298.6 ( 1 + 0.08)2 = $ 22546.8

If she plans to make 4 deposits, the deposit to be made each year is found using the future value of annuity equation.

Solving for the value of A in the above equation,

The deposit to be made each year  = $ 5003.6 $ 5004

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