Question

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. The amount the couple placed in a college savings account for their daughter will be worth $97,332 on her 18th birthday. Suppose college tuition, books, fees, and other costs average $13,000 per year today. On average, these costs have historically increased at a rate of 4% per year. Assume that college costs continue to increase an average of 4% per year and that the interest earned on the savings account is 8%. How much money in $) will the couple's first baby need to have available at age 18 to pay for all four years of her college (assuming that college costs for the year are incurred at the beginning of the year)? (Round your answer to the nearest dollar.) Have her parents deposited enough money? Yes No

Answer 1

Assumption: 1. College cost is incurred at the beginning of the year, therefore ordinary payment cycles are followed.

2. College cost (college tuition, book, fee and other costs) remain fixed for the remaining tenure of the 4 years of the college, so if at year 1 college costs $1000 then it will cost $1000 for the remaining three years also, therefore total college cost for 4 years turned out to be $4000(just an example).

Ans.:

Inflation rate: 4%

Return on savings: 8%

Year	Present Cost of College
1(At age of 18th)	$13000
2(At age of 19th)	$13000
3(At age of 20th)	$13000
4(At age of 21th)	$13000

Therefore the total cost of college at present turned out to be: $13,000*4 = $52,000

Corpus required at the age of 18th of the child: $52,000*(1+rate of inflation)^(number of years)

= 52,000*(1+0.04)^18

= $105,342 ....(1)

So the available corpus for education in savings account for the child's 18th birthday: $97,332 ....(2)

So the available corpus being: $8,010 short from the needed corpus. from (1)-(2)

Therefore the couple needs $8,010 more at the account at the time of child's 18th birthday.