Question

In: Finance

Henry Spencer is interested in saving money to puthis son, shawn through college.  Shawn i turning...

Henry Spencer is interested in saving money to put his son, shawn through college.  Shawn i turning 3 years old
today, and Henry wants to start depositing an amount into Shawn's savings acount each birthday until he turns 21.
He wants the amount to be just enough to pay for all 4 years of Shawn's education.  You can assume that tuition
payments will be made on Shawn's 18th through 21st birthdays.  You can also assume that the current cost of
tuition is $7,500 a year, and that the cost is supposed to increase by 6% per year.  If Henry is able to earn 7.5%

a year on his savings, how much should he deposit in the acount each year?

Henry Spencer is interested in saving money to put his son, shawn through college.  Shawn i turning 3 years old    
today, and Henry wants to start depositing an amount into Shawn's savings acount each birthday until he turns 21.    
He wants the amount to be just enough to pay for all 4 years of Shawn's education.  You can assume that tuition    
payments will be made on Shawn's 18th through 21st birthdays.  You can also assume that the current cost of    
tuition is $7,500 a year, and that the cost is supposed to increase by 6% per year.  If Henry is able to earn 7.5%    
a year on his savings, how much should he deposit in the acount each year?        
                   
  PV of Total Tuition     Year Shawn's Age Tuition Deposit Account Balance  
  Annual Deposit Amount     0 3        
        1 4        
  Rate of Return 7.5%   2 5        
  Tuition Cost This Year $            7,500.00   3 6        
  Tuition Inflation Rate 6.0%   4 7        
        5 8        
        6 9        
        7 10        
        8 11        
        9 12        
        10 13        
        11 14        
        12 15        
        13 16        
        14 17        
        15 18        
        16 19        
        17 20        
        18 21        
                   
   

Solutions

Expert Solution

Age Tuition Fees FV of Tuition Fee at end of year 21  
18 $                     17,974.19 $                                                 22,329.28  
19 $                     19,052.64 $                                                 22,017.70  
20 $                     20,195.80 $                                                 21,710.48  
21 $                     21,407.54 $                                                 21,407.54  
FV of the fees when he is 21 $                                                 87,465.00  
       
Fees per year when he was 3 7500  
Increase in fees every year 6%  
Rate of Interest 7.50%  
       
       
How much he should deposit in bank in order to be able to pay for his fees:-
       
Time of Savings 18 Years  
Amount need to be saved when is 21 $                                                 87,465.00  
Rate of Interest 7.50%  
So, Annual savings $                                                   2,451.55  

Answer is marked in yellow

Formula for Annual savings= Future Value / [ { ( 1 + Rate )Time - 1 } / Rate ]  


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