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August 29, 2014

Homework Help: Finance

Posted by Alice on Thursday, October 20, 2011 at 11:13pm.

5. John and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 (t=0), and she will be entering college 8 years from now (at t=8). College tution and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years-if she takes longer or wants to go to graduate school, she will be on her own. Tution and other costs will be due at the begining of each school year (at t=8,9,10, and 11).

So far,John and Daphne hace accumulated $15,000 in their college savings account (at t=0). Their long-run financial olan is to add an additional $5,000 in each of the next 4 years(at t=1,2,3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t=5,6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t= 5,6, and 7 be to cover Ellen's anticipated college costs?

a. $1,965.21
b. $2,068.64
c. $2,177.51
d. $2,292.12
e. $2,412.76

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