Joann wants to save for her daughter's education. Tuition costs $10,000 per year in today's dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 4 years. She can earn 11% on her investments and tuition inflation is 6%. How much must she save at the end of each year if she wants to make her last savings payment at the beginning of her daughter's first year of college?

Instructions are listed below.

Explanation:

Giving the following information:

Joann wants to save for her daughter's education. Tuition costs $10,000 per year in today's dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 4 years. She can earn 11% on her investments and tuition inflation is 6%.

First, we must find the cost of the tuition for 18 years and so on from now.

FV = PV * (1+i) ^n

FV = 10,000 * (1.06) ^18 = 28,543.39

Year 2 = 28,543.39*1.06 = 30,256

Year 3 = 30,256*1.06 = 32,071.36

Year 4 = 32,071.36 = 33,995.64

Total = 124,866.39

Now, we can calculate the annual deposit:

FV = {A*[ (1+i) ^n-1]}/i

A = annual deposit

Isolating A:

A = (FV*i) / {[ (1+i) ^n]-1}

A = (124,966.39*0.11) / [ (1.11^18) - 1] = $2,479.69