Question

Question 7 Not yet answered Marked out of 7.00 P Flag question A couple is planning to finance its three-year- old son's university education. Money can be deposited at 6% compounded quarterly. What quarterly deposit must be made from the son's 3rd birthday to his 18th birthday to provide $7000 on each birthday from the 18th to the 21st? (Note that the first deposit is made three months after the 3rd birthday and the last deposit is made on the date of the first withdrawal.) Answer:

Answer 1

1]	The PV of the college fees is calculated as below:
	Fee payable at the 18th birthday = 7000/1.015^72 =	$       2,396.31
	Fee payable at the 19th birthday = 7000/1.015^76 =	$       2,257.77
	Fee payable at the 20th birthday = 7000/1.015^80 =	$       2,127.23
	Fee payable at the 21st birthday = 7000/1.015^84 =	$       2,004.24
	PV of the fees, with quarterly compounding	$       8,785.55
2]	The amount at [1] should be the PV of the deposits to
	be made for the next 60 quarters.
	Using the formula for PV of annuity, we have
	8785.55 = A*(1.015^60-1)/(0.015*1.015^60), where A is
	the quarterly deposit required.
	So. A = 8785.55*0.015*1.015^60/(1.015^60-1) =	$          223.10