Question

Mrs. Brown is considering setting up a college fund for her grandson. Mrs. Brown wants to pay her grandson's tuition fees of $5,000 each year for four years. Assume that she saves an equal amount each year, and the first deposit is made one year from now. Interest rates will remain constant at 8 percent.

How much must Mrs. Brown save each year? Assume her grandson will go to college in 18 years and tuition fees are paid once a year at the beginning of the year.

(Which formula did you use?)

Answer 1

Firstly, we need the present value for a asset that pays $5,000 for four years at 8% at the beginning of every year.

(PVAF(8%,4)+1) * 5000 = 3.5771 * 5000 = $17,885.48

That is the future value after 18 years we need, and we need an equated annual installment to reach that amount at 8%.

PMT ( 8%,18years,,17,885.48) = $477.58

or simply PMT =

==> = (17885.48*0.08)/(1.08¹⁸ - 1) = 1430.84/2.996019

==> PMT = $477.5798

PMT is the periodic saving of Mrs. Brown