A couple has just given birth to a baby and named him Jimmy. They want to setup

Question

A couple has just given birth to a baby and named him Jimmy. They want to setup a college savings account for Jimmy and start saving for his college education. The following facts will help you work this problem:

Current Cost of Tution, Room & Board                                            $25,000

Expected Average Inflation                                                                     5%

Expected Average Percentage Return on Savings                               4%

Years until you need the first tution payment                                         18

You will make 18 yearly payments with the first one starting a year from now.

How much will you need at the end of 18 years to fund Jimmy's college education for 4 years? Round your answer to a whole number (Example 150450.61 rounded to 150451 with no commas or dollar signs).

How much will you need to save each year in Jimmy's account to reach your goal of having enough money to fund his college education at the end of 18 years? Round your answer to a whole number (Example 1450.61 rounded to 1451 with no commas or dollar signs)

Explanation / Answer

a. Money which will be needed at the end of 18 years to fund Jimmy's college education for 4 years = (25,000 x 1.0518) + (25,000 x 1.0519) + (25,000 x 1.0520) + (25,000 x 1.0521) = $259,320.74

b. Savings to be made each year = 259,320.74 / CVAF(4%, 18years) = 259,320.74 / 25.6454 = $10,111.78

Note: For the value of CVAF refer CVAF table.

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