You are saving for the college education of your two children. They are two year

Question

You are saving for the college education of your two children. They are two years apart in age; one will begin college in 6 years, and another in 8 years. You estimate your first child’s college expenses to be $25,000 per year, paid at the beginning of each college year (first payment is at year 6 and so on). You estimate your second child’s college expenses to be $30,000 per year, paid at the beginning of each college year (first payment at year 8 and so on). The annual interest rate is 6 percent. How much money must you deposit in an account each year to fund your children’s education? You will begin payments one year from today. You will make your last deposit when your oldest child enters college. Also assume that each child will take 4 years to graduate from college.

A)$25,714.29

B)$23,472.18

C)$24,880.51

D)$28,672.53

E)None of the above

Explanation / Answer

Option E
Let annual depsoits be x
Hence,
Present value of deposits=Present value of withdrawals
x/1.06+x/1.06^2+x/1.06^3+x/1.06^4+x/1.06^5=25000/1.06^5+25000/1.06^6+25000/1.06^7+25000/1.06^8+30000/1.06^7+30000/1.06^8+30000/1.06^9+30000/1.06^10
=>x=33686.5698079706

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