Question

Samuel's Dad is looking to deposit a sum of money immediately into an account that pays an annual interest rate of 9.00% so that his first-year college tuition costs are provided for. Currently, the average college tuition cost is $12,000 and is expected to increase by 3.00% per year (the average inflation rate). Samuel just turned 3 and is expected to start college when he turns 18. How much money will Samuel's Dad have to deposit into the account

Answer 1

Answer: $5,132.66

Explanation:

If the current tuition costs are $12,000 but increasing at a rate of 3% every year, the cost of tuition in first year when Samuel will be 18 is;

= 12,000 * ( 1 + r) ^ n

= 12,000 * (1 + 3%) ^ (18 - 3)

= $18,695.61

Assuming that the account will pay 9% per year on an investment now, Samuels's Dad will have to pay the present value of the tuition fee discounted at 9%.

= 18,695.61 / ( 1 + 9%) ^ 15

= $5,132.66