A couple wants to save for their daughter\'s college expense. The daughter will

Question

A couple wants to save for their daughter's college expense. The daughter will enter college eight years from now, and she will need $40,000, $41,000, $42,000, and $43,000 in actual dollars for four school years. Assume that these college payments will be made at the beginning of each school year. The future general inflation rate is estimated to be 6% per year, and the annual inflation-free interest rate is 5%. What is the equal amount, in actual dollars, the couple must save each year until their daughter goes to college?

Explanation / Answer

I'm not absolutely certain on this answer, but it makes sense to me. I will explain how I came to this answer and am open for discussion, suggestion, criticism! First, I calculated the necessary annual payment for each year of college's need; Year 1 need = $40,000 - payment would be $4,188.87 x 8 years Year 2 need = $41,000 - payment would be $3,718.29 x 9 years Year 3 need = $42,000 - payment would be $3,339.19 x 10 years Year 4 need = $43,000 - payment would be $3,026.72 x 11 years Soo, with that in mind, it would make sense to add those annual payments together, which theoretically gives you how much you would need to pay each year in order to meeth the needs for each of the four years of college, thus; $14,273.07 seems like the answer to me.

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