Question

If the cost of college for Carl is $15,000/year today, how much will a year of college cost him when he starts in seven years if school expenses inflate at 6% for the next four years, and then at 5% for the remaining three years (to the nearest dollar)?

Answer 1

Ans) The Cost of college for Carl = $ 15000 per year today. Cost of college after 7 years = 15000*Fvifa ( 6%,4)+ A* Fvifa (5%,3) Where A = amount of the year 4th which is 15000*Fvifa(6%,4)

Cost of college after 7 years = 15000*[(1+0.06)^4-1]/0.06 +65619*[(1+0.05)^3-1]/0.05

= 65619.24 +206863.89 = 272483.13

We used the concept of future value of money

and used the formula for FVIFA(k,n) = ( 1+k)^n -1/k where k = inflation rate and n is number of years