Question 4b Assume that it costs 15000 per academic year now

Question 4(b) Assume that it costs $15,000 per academic year now (in 2018 year dollars) for tuition. a) If inflation averages 3% per year, and tuition is expected to increase at the rate of inflation what is the cost per year of a four-year college education for a student who will be starting college in Fall 2028 (i.e. 10 years from now). Assume tuition for the academic year is paic in full at the start of each academic year. (10 points) b) Starting in September 2018 (10 years before starting college), how much should be savec each month if the savings account earns 6% per year compounded monthly (0.5% pe month) if the account is to have sufficient funds by the end of August 2028 to cover the cost of 4 years of tuition. Draw a cash flow diagram to use with your analysis. (15 points)

Solution

Ans 4a)

If Tution fees increasing in line with interest rate then after 10 years will be

15000(1.03)^10=$20158.75

Ans 4b)

Taking information from above question we have

20158.75=x(1+(6%/12))^120+x(1+(6%/12))^119+...+x(1+(6%/12))+x

then x=20158.75/19.9426=$1010.83