Q1
Alex Vaughn
Henry Spencer is interested in saving money to put his son, Shawn, through college. Shawn is turning 5 years old today, and Henry wants to be able to deposit an equal amount into a savings account each birthday until Shawn turns 21. He wants the deposits to be just large enough to pay for all 4 years of Shawn's education, and he plans to make the first deposit today. You can assume that the tuition payments will be made on Shawn's 18th through 21st birthdays. You can also assume that the current cost of tuition is $25,000 a year, and that the cost will increase by 7.5% per year. If Henry is able to earn 4% a year in his account, how much should he deposit in the account each year?
(20 points total)
PV of Total Tuition
Rate of Return 4.0%
Tuition Cost Year 0 $ 25,000
Tuition Inflation Rate 7.5%
Year Shawn's Age Tuition Deposit Account Balance
0 5 $ 25,000.00 $ (34,031.04)
1 6 $ 26,875.00
2 7 $ 28,890.63
3 8 $ 31,057.42
4 9 $ 33,386.73
5 10 $ 35,890.73
6 11 $ 38,582.54
7 12 $ 41,476.23
8 13 $ 44,586.95
9 14 $ 47,930.97
10 15 $ 51,525.79
11 16 $ 55,390.22
12 17 $ 59,544.49
13 18 $ 64,010.33
14 19 $ 68,811.10
15 20 $ 73,971.93
16 21 $ 79,519.83
$ 806,450.88
