Question

Assume that your parents wanted to have saved for college by your 18th birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and earned per year on their investments. a. How much would they have to save each year to reach their​ goal? b. If they think you will take five years instead of four to graduate and decide to have saved just in​ case, how much would they have to save each year to reach their new​ goal?

Answer 1

Answer:

1. $2,670.21
2. $‭1,068.09‬

Explanation:

1. The payment is a fixed amount so is an annuity. Using the Future value of an annuity factor table, we can find the annuity factor for 18 years at 8%.

Future value of annuity = Payment * Future value of an annuity factor , 18 years, 8%

100,000 = Payment * 37.4502

Payment = 100,000/37.4502

= $2,670.21

2. Future value of annuity = Payment * Future value of an annuity factor , 18 years, 8%

140,000 = Payment * 37.4502

Payment = 140,000/37.4502

= $3,738.30

How much more would they pay = 3,738.30 - 2,670.21

= $‭1,068.09‬