Your child was just born and you are planning for his/her college education. Based on your wonderful experience in Financial Economics you decide to send your child to Hofstra University as well. You anticipate the annual tuition to be $60,000 per year for the four years of college. You plan on making equal deposits on your child's birthday every year starting today, the day of your child's birth. No deposits will be made after starting college. The first tuition payment is due in exactly 18 years from today (the day your child turns 18 - no deposit required, i.e. last deposit is on 17^th birthday). Assume the annual expected return on your investments is 10% over this period. 

 

(i)  Calculate the annual deposit. 

(ii)  Calculate the amount needed if only equal annual deposits are made on birthday's 5-10 inclusive. 

 

(iii) Calculate the amount needed if two equal annual deposits are made on birthday's 5 and 13. 

 

(iv) Now assume tuition rises 10% per year. 

 

Assuming first deposit will be made on your child's 1^st birthday. All other information is the same. 

What is the annual tuition payment? How does it compare? Is your answer surprising? 

Answer rating: 100% (QA)

To calculate the annual deposit we can use the present value of an ordinary annuity formula The formula is Annual Deposit Tuition Present Value of Ann... View the full answer