Suppose that your child will start college exactly ten years from today, and you

Question

Suppose that your child will start college exactly ten years from today, and you have estimated that the first year of college will cost $15,000 and the cost will increase at 5% per year for the following three years. The cost of each year’s education will be paid at the beginning of each year. If you plan to make monthly payments into an investment account that earns a 6% annual rate of interest, with the first payment to be made one month from today, such that you have just enough for the expected cost of the four years of education (let’s be unrealistic and assume your child will complete her/his education in four years) how much must those monthly payments be? (10 pts.)

Explanation / Answer

use pv formuale to find present value of the 15000 for 4 years. Asumking the increase in fee and interest rate remains ame from time of payment to next 4 years then money required

=15000+(15000*1.05/1.05^1)+(15000*1.05^2/1.05^2)+(15000*1.05^3/1.05^3)+(15000*1.05^4/1.05^4)

=60,000

use pmt formaule to find monthly payment

pmt(rate,nper,pv,fv,type)

=PMT(6%,10,60000,,0)

=$8152.08

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