Question

A professor has two daughters that he hopes will one day go to college. Currently, in-state students at the local University pay about $22,119.00 per year (all expenses included). Tuition will increase by 3.00% per year going forward. The professor's oldest daughter, Sam, will start college in 16 years, while his youngest daughter, Ellie, will begin in 18 years. The professor is saving for their college by putting money in a mutual fund that pays about 7.00% per year. Tuition payments are at the beginning of the year and college will take 4 years for each girl. (Sam's first tuition payment will be in exactly 16 years)

The professor has no illusion that the state lottery funded scholarship will still be around for his girls, so how much does he need to deposit each year in this mutual fund to successfully put each daughter through college. (ASSUME that the money stays invested during college and the professor will make his last deposit in the account when Sam, the OLDEST daughter, starts college.)

Answer 1

Step1: Calculate money required for each of the daughters for collage, considering inflation rate:

(Formula used: Future value = Present value *(1+rate of inflation)^number of years)

	Step 1
Year	Tution Fees (Daughter 1)	Tution Fees (Daughter 2)	Total
16	35,494.50		35,494.50
17	36,559.34		36,559.34
18	37,656.12	37,656.12	75,312.23
19	38,785.80	38,785.80	77,571.60
20		39,949.37	39,949.37
21		41,147.86	41,147.86

Step 2: Calculate the present value of total tution fees required at the end of year 16, when the professor will stop making investments.

(Formula used: Present value = Future value *(1/((1+investment returns)^number of years))

Step 2
Total	Present Value factor @ 7%	Present Value
35,494.50	1.0000	35,494.50
36,559.34	0.9346	34,167.60
75,312.23	0.8734	65,780.62
77,571.60	0.8163	63,321.53
39,949.37	0.7629	30,477.19
41,147.86	0.7130	29,337.85
Total investment value required at the beginning of year 16		258,579.30

Step 3: Calculate the annual investments professor needs to make:

Using financial calculator FVM function in end mode:

N=16, I/Y=7%, PV=0, FV=258,579.30 ----> PV=-9272.045449. That is the annual investment in mutual funds required to be made at each year end till year 16.