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​James Street's son, Harold, is 10 years old today. James wants to begin saving money for...

​James Street's son, Harold, is 10 years old today. James wants to begin saving money for Harold's college education, which Harold will begin on his eighteenth birthday. James estimates that it will cost $20,000, $22,000, $24,000, and $25,000 for his son's freshmen, sophomore, junior, and senior year respectively. Mr. Street plans to make these amounts available to his son at the beginning of each of these years.
Street would like to make eight annual deposits, the first of which would be made on Harold's eleventh birthday (one year from today) and the last on his eighteenth birthday (the day he leaves for college). These deposits will be made into an account paying 10% interest and he wants the account to be worth enough just to pay for Harold's education.
How much will Mr Street have to deposit into this account each year to provide for Harold's education (show all work)

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Expert Solution

Solution.>

The correct answer is $6,874.64

I have solved this question in Excel. The formula used are written along with the values. If you still have any doubt, kindly ask in the comment section.

Firstly we have to find the amount James must have after 8 years ie. on his son's 18th birthday from now so that it could give $20,000, $22,000, $24,000, and $25,000 for his son's freshmen, sophomore, junior, and senior year respectively. Hence we calculate the PV at his 18th birthday as shown below.

Then we have to find the amount he must invest each year for 8 years so that it matures into the amount calculated above in 8 years. Hence the PV calculated above will now becomes the Future Value in this case.

The formula used in excel is = PMT(Rate,NPER,PV,-FV)

It has been shown in the excel below.

Note: Give it a thumbs up if it helps! Thanks in advance!

jeff jeffy answered 1 year ago
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