Your younger sister, Brittany, will start college in five years. She has just in

Question

Your younger sister, Brittany, will start college in five years. She has just informed your parents that she wants to go to Eastern State U., which will cost $30,000 per year for four years (costs assumed to come at the end of each year). Anticipating Brittany's ambitions, your parents started investing $5,000 per year five years ago and will continue to do so for five more years. How much more will your parents have to invest each year for the next five years to have the necessary funds for Brittany's education? Use 10 percent as the appropriate interest rate throughout this problem (for discounting or compounding). Round all values to whole numbers.

Explanation / Answer

Present value of the funds required (after 4 years) = 30,000 X PVAF (4 yrs ; 10 %)

= $95,095.96

Current Present Value of the funds Invested = 5,000 X CVAF (10% , 5 years)

= 5,000 X 6.1051 = $30,525.50

Extra amount needed = 95,095.96 - 30,525.50

= $ 64,570.46

Amount to be invest every year = 64,570.46

(UAF (10%, 5 yeras))

= 64,570.46

   (UAF (10%, 5 years))

= 64,570.46

6.1051

= $ 10,576.48

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