1Tuition costs for a student are expected to inflate at the

1.Tuition costs for a student are expected to inflate at the rate of 8 percent per year. To prepare enough money for the tuition costs for the next four years, a student plans to set up a savings account. The first year\'s tuition of $2,000 is due one year from now. Assuming that the savings account has an interest rate of 5%, the amount of money that the student needs to deposit in the savings account now is closest to:

2. Receipts from an investment will be $1,000 at the end of the first year and decline by $150 each year for 5 years thereafter. Assuming that the interest rate is 7%, the equivalent constant annual investment receipt amount is closest to:

Solution

(1)

Required present value ($) = 2,000 x P/A(5%, 4) = 2,000 x 3.5460** = 7,092

(2)

First, we compute Present Worth (PW) of investment as follows. Note that PV Factor in year N = (1.07)^-N

Equivalent annual investment = PW / P/A(7%, 5) = $3,119.78 / 4.7665** = $654.22

**From P/A and P/F Factor tables