Question

Suppose that a young couple has just had their first baby and they wish to insure 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. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughter's first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, then the amount available for the daughter's college expenses on her 18th birthday is closest to ________.

Answer 1

Answer:

$160,463 will be available for daughter college expense o her 18th birthday.

Explanation:

According to the Given Condition;

Deposit Amount = $2,400

Rate of Return = 9%

Size of Deposit increase every year at 7%

Hence the Growing Annuity is

Annuity = $2400 * \frac{1}{0.09 - 0.07} * [1 - (\frac{1+0.07}{1+0.09})^{18} ] (1.09)^{18}$

Annuity = $160,463

Thus,  $160,463 will be available for daughter college expense o her 18th birthday.