Northeastern costs approximately $50,000 per year for a four-year program, whether completed in four years or five. Assume that a student’s parents realized 15 years ago that college was going to cost $50,000 per year for four years, and wondered how much they would have to save each year to have the money to pay for the student’s education. The assumption is that payments are made into the college fund each year (as an ordinary annuity), and payments are withdrawn from the fund at the end of the relevant years.The key information for this scenario is as follows: The number of years of contributions is 18. Assume for simplicity that the college payments will be made at the end of years 15, 16, 17, and 18, that is just after each deposit in those years. The interest rate is 10 percent. College costs are $50,000 per year, and are assumed to be the same for each of the four years. Using the key information for the scenario above, how much would the parents have to save each year for 18 years to have exactly the amount of money needed to pay the student’s expenses? (Solve for the annual savings that will exactly match the amount saved to the amount needed for college.) Be sure to include your calculation formulas in your answer.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 33P

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Northeastern costs approximately $50,000 per year for a four-year program, whether completed in four years or five. Assume that a student’s parents realized 15 years ago that college was going to cost $50,000 per year for four years, and wondered how much they would have to save each year to have the money to pay for the student’s education. The assumption is that payments are made into the college fund each year (as an ordinary annuity), and payments are withdrawn from the fund at the end of the relevant years.

The key information for this scenario is as follows:
1. The number of years of contributions is 18.
2. Assume for simplicity that the college payments will be made at the end of years 15, 16, 17, and 18, that is just after each deposit in those years.
3. The interest rate is 10 percent.
4. College costs are $50,000 per year, and are assumed to be the same for each of the four years.

Using the key information for the scenario above, how much would the parents have to save each year for 18 years to have exactly the amount of money needed to pay the student’s expenses? (Solve for the annual savings that will exactly match the amount saved to the amount needed for college.) Be sure to include your calculation formulas in your answer.

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