Question

Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton University, which will cost $36,000 per year for four years (cost assumed to come at the end of each year). Anticipating Linda's ambitions, your parents started investing $5,600 per year five years ago and will continue to do so for five more years. Use 10 percent E as the appropriate interest rate throughout this problem (for discounting or compounding). How much will your parents have to save each year (A?) for the next five years in addition to the $5,600 they are currently saving to have the necessary funds for Linda's education? Use Appendix C and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) PVA = $17? FVA= $2? A? A? A? A? A? 2 2 2 2 2 2 2 2 2 2 -17 -17 -17 -17 1-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 Additional annual savings required

Answer 1

The amount required in savings five years from now is calculated as below :

N = 4 (number of years in college)

PMT = -36000 (yearly college fee)

I/Y = 10 (discount rate)

CPT --> PV

PV is calculated to be $136,468.32

Value of savings 5 years from now (if $5,600 is invested for the remaining 5 years) is calculated as below :

N = 10 (total number of yearly savings)

PMT = -5600 (yearly saving)

I/Y = 10 (discount rate)

CPT --> FV

FV is calculated to be $89,249.58

Remaining funds required =  $136,468.32 - $89,249.58 = $47,218.75

Additional annual savings required is calculated as below :

N = 5 (remaining number of yearly savings)

I/Y = 10 (discount rate)

PV = 0   

FV = 47218.75 (Remaining funds required)

CPT ---> PMT

PMT is calculated to be -$7,734.31

Additional annual savings required is $7,734.31