Question

Mathew Weir plans to pay for his son’s college education for 4 years starting 8 years from today. He estimates the annual tuition cost at $45,000 per year, when his son starts college. The tuition fees are payable at the beginning of each year. How much money must Matthew invest every year, starting one year from today, for the next seven years? Assume the investment earns 9 percent annually.

Answer 1

College will start after 8 years for 4 years with Annual Cost $45,000

Calculating Present Value at the start of Year 8,

Present Value of Annuity Due = P + P[(1 - (1+r)^-(n-1))/r]

Present Value at the start of Year 8 = 45000 + 45000[(1 - (1.09)^-3)/0.09]

Present Value at the start of Year 8 = $158,908.26

From Year 1 to Year 7,

Calculating Annual Deposit,

Using TVM Calculation,

PMT = [PV = 0, FV =158,908.26, T = 7, I = 0.09]

PMT = $17,271.83

So,

Annual Deposit Required = $17,271.83