Suppose that you are planning to pay for your child's college tuition. Your child was just born (t=0), and all four years of college tuition for your child will be due exactly on the child's 18^th birthday (t=18). You think for the first 8 years you can afford to set aside $4,000 per year (with the first deposit being made at the end of the first year). How much will you have to save in years 9 through 18 so that you have exactly $400,000 saved up for college tuition payments at the end of year 18? Assume that the annual discount rate is 7%.

Question 1: Use the annuity formula to calculate the present value of the savings for the first 8 years.

Question 2: Compute the present value of the $400,000 we want to end up within 18 years

Question 3: What is the savings deficit (Amount in Q2 - Amount in Q1)

Question 4: What is the value of the savings deficit at the end of year 8? (move the present value PV (t=0) to the future value FV (t=8))

Question 5: Using the annuity formula as of year 8, how much needs to be saved each year in years 9 through 18?

Answer rating: 100% (QA)

Question 1 To calculate the present value of the savings for the first 8 years we can use the annuity formula PV PMT 1 1 rn r Where PV is the present ... View the full answer