Question

2. As you may know a college education is expensive. Some parents start saving early for their child's education. Consider this scenario. Your child will need $22,000 when they are 18, $25,000 at age 19, $28,000 at 20, and $31,000 at 21. Assume you can invest at 6% compounded annually. You have two options: a) Deposit a lump sum at year 1 and let it grow until enough accrues to cover the education expense. How much would need to be deposited for this option? b) Make uniform annual payments from year 1 through year 17 and build the savings account to accrue the required amount. HINT: Construct the cash flow diagram to deduce any relationship in the education withdrawals. Recall how arithmetic gradient works.

Answer 1

Age 19 CF 22000 25000 28000 31000 20 21 NPV @ age 18 $96,533.00 Amount to be deposited once $35,848.92 -PV(6%,17,0,96533.) Uniform deposits NPV @ age 17 $91,068.87 PMT $3,227.92 PMT(6%.17.0,91068.87,0)