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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 university education. Currently university tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
-Assuming that university costs continue to increase an average of 4% per year and that all her university savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:
A) $97,110
B) $107,532
C) $101,291
D) $50,000

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Quizplus · Accepted Answer

A) This is a two-step problem. Step #1 determine the cost of the first year of university. FV = PV(1 + i)^N = $12,500(1.04)¹⁸ = $25,322.71 Step #2 figure out the value for four years of university. PV of a growing annuity due = C × 11ea7e5a_6e16_dd1d_9a0a_97a57d9d7e51_TB1623_11 11ea7e5a_6e17_042e_9a0a_a76053d3fff4_TB1623_11 (1 + r) = $25,322.71 × 11ea7e5a_6e17_042f_9a0a_c36877f87d69_TB1623_11 11ea7e5a_6e17_0430_9a0a_758f6da4ef6a_TB1623_11 (1 + .07) = $97,110.01

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