Question

1. Glenn is starting an annuity, into which he plans on making monthly payments, to save money for his new-born daughter to go to college. He figures he can get an average of 6% compounded monthly on his money. How much should his payments be to have enough to fund his daughter to attend Ivy Tech for 4 years (estimated annual cost $18,000) if he starts saving as soon as she is born and gives her all the money for college when she is 18 years old.

Answer 1

First we need to find the value of the college costs at the beginning of the college

No of periods = 4

Rate per period = 6%

Payment per period = $18000

FV = 0

Using PV function in excel:

Amount =PV(6%,4,-18000,0) = $62371.90

Now taking this as the future value to be accumulated at the end of 18 years we need to find the monthly payment:

No of periods = 18*12 = 216

Rate per period = 6%/12

FV = $62371.90

Using PMT function in excel:

Monthly payment =-PMT(6%/12,216,0,62371.9) = $161.02