Question

7. You plan to establish a college education fund for your child. The current cost for college is $12,000 per year and you expect this cost to increase by $600 per year. You plan to deposit money into an account earning 10% yearly nominal interest, compounded monthly, at the end of each year for the next 17 years. You will withdraw the amount required for college in the end of years 18 to 21 to pay for college for years 18 to 21, respectively. You would like to deposit a low initial amount, which you plan to increase at a rate of $50 per year. How much is your first deposit (end of year 1) to this account? HINT: Equate the present value of the cost of college to the present value of your savings

Answer 1

Since the Cost of College fees is currently $12000/- and is increasing by $600 every year. Accordingly cost of 18-21 years would be

Year	FEES
18	22800
19	23400
20	24000
21	24600
Total	94800

(We have presumed that Fees will be paid at the end of the year 18,19,20 & 21)

As we know the target amount, by doing calculation in excel with given interest rate of 10% compounded monthly and deposit amount increasing by $50 every year i.e. x+50 incase x is deposit amount in First year, and withdrawal will happen from 18^th year to 21^st year , we have arrived at a figure of $1465 to be made initial deposit at the end of 1^st year.