Tom and Mary James just had a baby. They heard that the cost of providing a college education for this baby will be $100,000 in 18 years. Tom normally receives a Christmas bonus of $4,000 every year in the paycheck prior to Christmas. He read that a good stock mutual fund should pay him an average of 10 percent per year. Tom and Mary want to make sure their son has $100,000 for college. Consider each of the following questions.
a. How much does Tom have to invest in this mutual fund at the end of each year to have $100,000 in 18 years?
b. If the bonus is not paid until the first of the year, how much does Tom have to invest at the beginning of each year to have $100,000 in 18 years?
c. Tom’s father said he would provide for his grandson’s education. He puts $10,000 in a government bond that pays 3 percent interest. His dad said this should be enough. Do you agree?
d. If Mary has a savings account worth $50,000, how much must she withdraw from savings and set aside in this mutual fund to have the $100,000 for her son’s education in 18 years?
e. If Mary has been advised to keep the $50,000 in her savings account earning 4 percent compounded monthly, how much additional money will she have to set aside in the stock mutual fund to have the $100,000 for her son’s education in 18 years?