Question

Joanna’s Dad is looking to deposit a sum of money immediately into an account that pays an annual interest rate of 9% so that her first-year college tuition costs are provided for. Currently, the average college tuition cost is $15,000 and is expected to increase by 4% (the average annual inflation rate). Joanna just turned 5, and is expected to start college when she turns 18. How much money will Joanna’s Dad have to deposit into the account?

Answer 1

ANS= Joanna's dad have to deposit $8,146.67 today.

- After 13 years joanna will go to college [i.e expected age to start college(18) subtract Joanna's current age(5)]

- Tution fee increase after13 years = current tuition cost * (1+inflation)n , n= number of years

- Tuition fee after 13 years = 15000 * (1+0.04)13  = $24,976.102.

- Present value of tution fees after 13 years = Future value / (1+ interest rate)n , n= Number of years.

# PV of tuition fees after 13 years = 24,976.102 / (1+0.09)13 = $8,146.6714

Joanna's dad have to deposit $8,146.6714 today to pay Joanna tuition fees after 13 years.