Ms. Wells has a child and wishes to begin saving for Junior's college expenses. Junior will enter college in six years. Assume that Junior will spend 4 years in college, that the current (time zero) annual tuition is currently (time 0) $65,000, that the nominal interest rate is 6.05%, that the expected rate of inflation for tuition is 5.0%, and that the first college payment is due at time 6 and the last payment is due at time 9. Ms. Wells wants to make 9 annual investments (beginning one year from now and ending 9 years from now) such that the savings will cover the cost of college. Her first investment (at 1) will be $A and subsequent investments will grow at 6% per year. In order to completely cover the college expenses with the 9 investments: 

a) What initial annual investment, A, will be required at time 1? 

b) What is her annual investment at time 9? 

c) What is the real amount of her annual investments in years 1 and 9 (that is, in terms of time 0 purchasing power)?

 

Answer rating: 100% (QA)

To determine the required annual investments for Ms Wells to cover her childs college expenses we ne... View the full answer