Your younger sister, Linda, will start college in five years. She has just infor
ID: 2786063 • Letter: Y
Question
Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton University, which will cost $31,000 per year for four years (cost assumed to come at the end of each year). Anticipating Linda’s ambitions, your parents started investing $5,100 per year five years ago and will continue to do so for five more years. Use 9 percent as the appropriate interest rate throughout this problem (for discounting or compounding). How much will your parents have to save each year for the next five years in addition to the $5,100 they are currently saving to have the necessary funds for Linda's education? Use Appendix C and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Explanation / Answer
After five years 31000 for next four years
5100 per year for five years
Discount Rate = 9%
PV off $31000 per year at the end of five years, to be paid as fees for next four years after five years.
PV = 31000/(1+0.09)^1 + 31000/(1+0.09)^2 + 31000/(1+0.09)^3 + 31000/(1+0.09)^4
PV of the fees at the end of five years = $1,00,431/-
In order to save $1,00,431/- at the end of five years, the per year contribution required is calculated with the help of financial calculator (Texas BA II Plus).
Insert the following inputs to find the PMT.
FV = 100431
PV = 0
I/Y = 9%
N = 5
CPT --> PMT
By following above steps we get PMT as $16,781.
Per year contribution required to be saved for next five years, so that the fees requirement of $31000 per year for next four years, could be met by the parents.
As they are already contributing $5100 every year, a differential amount of $16,781 - $5,100 = $11,681 additionally have to be set aside to cover for the University fees of Linda, taking 9% rate of interest into consideration.
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