Question

Please show the step-by step calculation (as if you were using a financial calculator) to find...

Please show the step-by step calculation (as if you were using a financial calculator) to find out how much money is needed in lump-sum pay for two children's education (Age 10 and Age 12), assuming they begin college at age 18. Assume that inflation rate for tuition is 4.5%.

Then, find out how much they would need in lump-sum if they had $40,000 for each child (80k total) and that money earned a 7% rate of return.

Please show work - thanks!

Homework Answers

Answer #1
Child one Child two Total
Current age 10 12
Begin college 18 18
Time to college 8 6
Inflation rate 4.50% 4.50%
Interest rate 7% 7%
Amount invested - A 40000 40000
Reall Interest rate (Total interst rate - inflation rate) 1.035 1.035
Real Interest to the power of time to college - B 1.3168 1.2293
Amount at 18 years of age (Actual interst (B) * Amount Invested (A)) 52,672 49,170 101,843
Total lumpsum amount needed is 101, 843 for both the kids
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