Question

Chip and Chip's Spouse would like to save money for their newborn child's education. They would like to plan on $25,000 in todays dollars. Their child was born now and will start College in 18 years. They are planning on their child attending for 4 years. Chip and Chip's Spouse believe they can earn 8.5% on their investments and that tuition inflation will average 4.25% going forward. How much must Chip and Chip's Spouse save per year if they want to make their last payment the day before their child starts College?

Answer 1

Solution:

The above mentioned problem is a time value of money problem.

Future value or the value at the starting of the college = $25000

Time for the investment = 18 years , n=18

rate of investment = 8.5% , Tuition Inflation = 4.25% : Net rate = 8.5 - 4.25 = 4.25%

We need to calculate the amount to be saved each year to achieve $25000. i.e. PMT = ??

Entering the given values in the TVM row of our BA II plus calculator and press CPT + PMT

FV = 25000 , n = 18 , I/Y = 4.25 , PV =0 , PMT =?

CPT+PMT => 952.67

So Chip and family should save $952.670 each year