# Solved Question: You are saving for the college education of your two children

## Description

Question:

You are saving for the college education of your two children. They are two years apart in age; one will begin college 14 years from today and the other will begin 16 years from today. You estimate your children’s college expenses to be \$37,000 per year per child, payable at the beginning of each school year. The annual interest rate is 7.3 percent. Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. Assume your children will be on the four-year plan. How much money must you deposit in an account each year to fund your children’s education?

Expected Expenses:

Year 14 = \$37,000
Year 15 = \$37,000
Year 16 = \$37,000 + \$37,000 = \$74,000
Year 17 = \$37,000 + \$37,000 = \$74,000
Year 18 = \$37,000
Year 19 = \$37,000

Annual Interest Rate = 7.30%

Value of Expenses at the end of Year 14 = \$37,000 + \$37,000/1.073 + \$74,000/1.073^2 + \$74,000/1.073^3 + \$37,000/1.073^4 + \$37,000/1.073^5
Value of Expenses at the end of Year 14 = \$249,583.62

So, parents need \$249,583.62 after 14 year

Annual Deposit * FVIFA(7.30%, 14) = \$249,583.62
Annual Deposit * (1.0730^14 – 1) / 0.0730 = \$249,583.62
Annual Deposit * 23.03579 = \$249,583.62
Annual Deposit = \$10,834.60

So, they are required to deposit \$10,834.60 every year.

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