Answer:
Instructions are listed below
Explanation:
Giving the following information:
The son will enter college 10 years from now. An annual amount of $40,000 in constant dollars will be required to support the son's college expenses for four years.
The future general inflation rate is estimated to be 6% per year, and the market interest rate on the savings account will average 8% compounded annually
A) We need to find the present value for each 40,000-year expense.
Formula= FV/(1+i)^n
1: PV= 40,000/(1.06)^10= 22,335.80
2: PV= 40,000/(1.06)^11= 21,071.50
3: PV= 19,878.77
4: PV= 18,753.56
B) Total final value= 160,000
PV= 160,000/1.06^10= $89,343.16
C) We need to use the following formula:
FV= {A*[(1+i)^n-1]}/i
A= annual deposit
Isolating A:
A= (FV*i)/{[(1+i)^n]-1}
A= (160,000*0.06)/[(1.06^10)-1]= $12,138
