James Street’s son, Harold, is 10 years old today. Harold, a studious young fellow, is already making plans to go to college on his 18th birthday, and his father wants to start putting money away now for that purpose. Street estimates that Harold will need $18,000, $19,000, $20,000, and $21,000 for his freshman, sophomore, junior, and senior years, respectively. He plans on making these amounts available to Harold at the beginning of each of these years.
Street would like to make eight annual deposits (the first of which would be made on Harold’s 11th birthday, one year from now, and the last on his 18th birthday, the day he leaves for college) in an account earning 10 percent annually. He wants the account to eventually be worth enough to just pay for Harold’s college expenses. Any balances remaining in the account will continue to earn the 10 percent.
How much will Street have to deposit in this “planning” account each year to provide for Harold’s education?