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PROBLEM:

Your child is going to start college in Fall 2026. The annual tuition today is $32,000, and it is expected to grow by 3% annually until that year. For simplicity, you may assume that tuition will remain constant at the 2026 rate for the four years that your child attends. You expect to pay this constant tuition in Fall 2026, 2027, 2028, and 2029. Assume a rate of return of 7% a year on your deposits.

A. You plan to make 6 equal annual deposits starting today and running through Fall 2021 that will be sufficient to pay the expected tuition. How much should these deposits be?

B. After having made the first 4 deposits as planned, you learn that tuition will actually be $48,000 a year for the four years. Two more of the original planned deposits will not be enough to pay for the four years of tuition. Instead of the last two planned deposits, what amount should the last two deposits be such that the four $48,000 tuition bills are covered?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91983663

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