I am planning to invest $1,000 at the end of each month to my daughter’s college...

I am planning to invest $1,000 at the end of each month to my daughter’s college (starting at the end of this month) fund that earns a 12% annual rate of return compounded monthly. Assuming that she starts college in exactly 5 years and she will spend 4 years in college, how much tuition can she afford to pay at the beginning of each of her 4 years in college? (Round to nearest dollar)

Select one:

a. $24,008

b. $24,205

c. $26,888

d. $27,275

e. None of the above.

Solutions

Expert Solution

Calculating Future Value of Deposit at the start of college,

Using TVM Calculation,

FV = [PV = 0, PMT = 1,000, N = 60, I = 0.12/12]

FV = $81,669.67

Now,

EAR = (1 + 0.12/12)¹² - 1 = 12.68%

Calculating Annual Payment,

Using TVM Calculation,

PMT = BEG[PV = 81,669.67, FV = 0, N = 4, I = 0.1268]

PMT = $24,205

Annual Payment = $24,205

jeff jeffy answered 1 year ago

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