A father wants to save for his 8-year-old son’scollege expenses. The son will enter college 10 yearsfrom now. An annual amount of $40,000 in today’sconstant dollars will be required to support the son’scollege expenses for four years. Assume that thesecollege payments will be made at the beginning ofthe school year. The future general inflation rate isestimated to be 6% per year, and the market interestrate on the savings account will average 8% compounded annually. Given this information,(a) What is the amount of the son’s freshman-yearexpense in terms of actual dollars?(b) What is the equivalent single-sum amount at thepresent time for these college expenses?(c) What is the equal amount, in actual dollars, thefather must save each year until his son goes tocollege
A father wants to save for his 8-year-old son’s
college expenses. The son will enter college 10 years
from now. An annual amount of $40,000 in today’s
constant dollars will be required to support the son’s
college expenses for four 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 market interest
rate on the savings account will average 8% compounded annually. Given this information,
(a) What is the amount of the son’s freshman-year
expense in terms of actual dollars?
(b) What is the equivalent single-sum amount at the
present time for these college expenses?
(c) What is the equal amount, in actual dollars, the
father must save each year until his son goes to
college
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