Question

Holly would like to plan for her daughter’s college education. She would like for her daughter, who was born today, to attend college for 4 years, beginning at age 18. Tuition is currently $10,000 per year and tuition inflation is 7%. Holly can earn an after-tax rate of return of 10%. How much must Holly save at the end of each year, if she wants to make the last payment at the beginning of her daughter's first year of college?

Answer 1

Holly must save $2845.81 at the end of each year

Step-by-step explanation:

first calculate the value of tuition fees at n = 18

Cash flow formula = Tuition ×
`(1+0.07)^(n)`

Discounted CF formula = Cash flow ÷
`(1+0.10)^(year)`

10.00% 0

Year Cash flows Discounted CF

0 33,799.32 33799.32

1 36,165.28 32877.52

2 38,696.84 31980.86

3 41,405.62 31108.66

FV = $129,766.37

PV = 0

N = 18

rate = 10%

using PMT function in Excel

Annual contribution = $2845.81