Question

eBook A father is now planning a savings program to put his daughter through college. She is 13, plans to enroll at the university in 5 years, and she should graduate 4 years later. Currently, the annual cost (for everything - food, clothing, tuition, books, transportation, and so forth) is $18,000, but these costs are expected to increase by 7% annually. The college requires total payment at the start of the year. She now has $9,500 in a college savings account that pays 10% annually. Her father will make six equal annual deposits into her account; the first deposit today and sixth on the day she starts college. How large must each of the six payments be? Do not round intermediate calculations. Round your answer to the nearest dollar. (Hint: Calculate the cost (inflated at 7%) for each year of college and find the total present value of those costs, discounted at 10%, as of the day she enters college. Then find the compounded value of her initial $9,500 on that same day. The difference between the PV of costs and the amount that would be in the savings account must be made up by the father's deposits, so find the six equal payments that will compound to the required amount.)

Answer 1

Do the calculation for the amount required and 6 equal payment required to be made by her father after netting off amount available in college savings account at the time of entering the college as shown in the table below -

Formulas entered in the above spreadsheet are shown as below -

Answer - father has to make 6 equal payment of $7481.

Please note that inflation and present value factor will be applied from today as the current values are given to arrive at the amount required on the day she enters the college. I hope above answer will be helpful in your task. Thank you.