Question

A new father plans on saving for his daughter’s college education.  He will donate $1,000 on her first birthday.  After that, he will increase his donation by 4.00% each year and will make his last contribution on her 18^th birthday.  If he can earn 7.50% each year in his investment account, how much will his daughter’s college fund be worth on her 18^th birthday?

Answer 1

This can be solved using Future value of growing annuity formula;

FV of growing annuity= A*[(1+r)^n -(1+g)^n]/(r-g)

where A= 1st year annuity payment ; r= interest rate ;g=growth rate ;n = no of years

FV of growing annuity= 1000*[(1+7.5%)^18- (1+4%)^18]/(.075-.04) =47142.5

ie: Daughters college fund will be worth 47142.5 on her 18th birthday