Question

You are saving up for your newborn daughter's education. You'd like for her to be able to attend University 18 years from today. Today's tuition, room and board at University is $23,000 per year but college costs are expected to increase 6% per year for the next 18 years. Assume, for simplicity, that the cost of attending will be constant her 4 years of college and that tuition payments are due at the beginning of each year. Your investment account earns 9% per year. How much must you save per month, with the first payment occurring at the end of this month, in order to fund her education? Assume annual compounding for the tuition cost increase and the PV of the tuition payments.   

Can you please solve this with the BA ii Plus financial calculator

Answer 1

First let us calculate the future value of college fees of 23000 growing at a rate of 6%, 18 years from now

Future Value = 23000 * (1.06)¹⁸

Future Value = 65,650$

Assuming the fees constant for 4 years, lets calculate total fees for 4 years.

Now lets calculate the present value of the fees. For that we have to set the BA ii plus calculator to beginning mode as the payments are made at the beginning of each year. Press 2nd PMT then 2nd ENTER then 2nd CPT.

Now, PMT - 65,650 N - 4 FV - 0 I/Y - 9 CPT - PV

Present value at 18th year = 2,31,829$

Now lets calculate savings at the end of each month to fund the fees of $2,31,829.

But again change the settings to end mode. 2nd PMT then 2nd ENTER then 2nd CPT

FV = 2,31,828 N = 216 (18 * 12) I/Y = 0.75 (9/12) PV = 0 CPT - PMT

Payment of $432.23 has to be made at the end of each month to fund the college fees of $2,31,829