Question

You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $43,000 per year per child, payable at the beginning of each school year. The appropriate interest rate is 7.3 percent. Your deposits begin one year from today. You will make your last deposit when your oldest child enters college.

Assume four years of college for each child. How much money must you deposit in an account each year to fund your children’s education?

Answer 1

Number of periods of deposit(nper) = 17-1 years = 16 years ( as the first deposit begins 1 year from today)

Rate = 7.3%

College expenses for the first child from Year 15 to Year 19 = $ 43,000 * 4 = $ 172,000

College expenses for the second child from Year 17 to Year 21 = $ 43,000 *4 = $ 172,000

PV of college expenses of first child = 172,000/(1+7.3%)^ 15 = $ 59,776.79

PV of college expenses of second child = 172,000/(1+7.3%)^ 17 = $ 51,919.82

Total PV of college expenses = $ 59,776.79 + $ 51,919.82 = $ 111,696. 61

Now , Deposit amount every year for 16 years = = $ 12,060.04