Question

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday until her 18th birthday. The parents deposit $3,000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year. Assume that the educational savings account will return a constant 6%. How much will the parents deposit (in $) on the second birthday

Answer 1

The parents would deposit $ 3150 on the second birthday.

Explanation:

The initial amount deposited on the first birthday- $ 3000

Incremental % for each year deposit- 5 %

Rate of Interest provided by the education savings account- 6%

The term for which they would be depositing- 18 years (until the baby turns of 18 years means 18 annual instalments)

The amount that parents would deposit on the second birthday-

The amount deposited by parents would be 5% more than the amount deposited by them on the previous birthday

Hence incremental amount would be 5% of 3000

(5/100) *3000= $ 150

The amount that would be deposited on 2nd birthday would be 3000+150= $ 3150