A couple wants to save for their daughter's college expense. The daughter will enter college eight years from now, and she will need $50,000, $51,000, $52,000, and $53,000 in actual dollars for four school years. Assume that these college payments will be made at the beginning of each school year. The future general inflation rate is estimated to be 7% per year, and the annual inflation-free interest rate is 6%.(a) What is the market interest rate to use in the analysis?(b) What is the equal amount, in actual dollars, the couple must save each year until their daughter goes to college?

A couple wants to save for their daughter's college expense. The daughter will enter college eight years from now, and she will need $50,000, $51,000, $52,000, and $53,000 in actual dollars for four school years. Assume that these college payments will be made at the beginning of each school year. The future general inflation rate is estimated to be 7% per year, and the annual inflation-free interest rate is 6%.(a) What is the market interest rate to use in the analysis?(b) What is the equal amount, in actual dollars, the couple must save each year until their daughter goes to college?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter2: The One Lesson Of Business

Section: Chapter Questions

Problem 2.6IP

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A couple wants to save for their daughter’s college expenses. The daughter will enter college eight years from now and will need $40,000, $41,000, $42,000 and $43,000 in actual dollars over four college years. Assume that these college payments will be made at the beginning of the school year. The future general inflation rate is estimated to be 6% per year and the annual inflation-free interest rate is 5%. What is the equal amount, in actual dollars, the couple must save each year until their daughter goes to college? A. $11,945 B. $12,142 C. $12,538 D. $11,838
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