Question

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7%. The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, what is the amount available for college tuition?

Answer 1

We can excel worksheet to solve this question as shown in the below table:

Annual deposit is increasing 5% every year. first deposit will be $2,000 and will earn interest for 17 years. second deposit will be $2,000*1.07 (including 5% increase) and will earn interest for 16 years. same way annual deposit will keep increasing by 5% and will earn interest by less than a year than previous deposit. so third deposit will earn interest for 15 years and so on. on the deposit made on 18th birthday, no interest will be earned on 18th year. interest on 18th deposit will be earned on 19th year.

the amount available for college tuition is $97,331.30.

Years	Annual deposit	Total value of deposit including interest
1	$2,000.00	$6,317.63
2	$2,100.00	$6,199.54
3	$2,205.00	$6,083.66
4	$2,315.25	$5,969.95
5	$2,431.01	$5,858.36
6	$2,552.56	$5,748.86
7	$2,680.19	$5,641.41
8	$2,814.20	$5,535.96
9	$2,954.91	$5,432.48
10	$3,102.66	$5,330.94
11	$3,257.79	$5,231.30
12	$3,420.68	$5,133.52
13	$3,591.71	$5,037.56
14	$3,771.30	$4,943.40
15	$3,959.86	$4,851.00
16	$4,157.86	$4,760.33
17	$4,365.75	$4,671.35
18	$4,584.04	$4,584.04
Total	$56,264.77	$97,331.30

Formulas and calculation