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Saving for college education for children

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A couple is planning for the education of their two children. They plan to invest the same amount of money at the end of each of the next 16 years. The first contribution will be made at the end of the year and the final contribution will be made at the time the oldest child enters college.

The money will be invested in securities that are certain to earn a return of 8 percent each year. The oldest child will begin college in 16 years and the second child will begin collegte in 18 years. The parents anticipate college costs of $25,000 a year (per child). These costs must be paid at the end of each year. If each child takes four years to complete their college degrees, then how much money must the couple save each year?

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Solution Summary

The solution explains how to use time value of money to find the savings that need to be done for college education

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Let us take the 2 children separately. The first child will start education in 16 yr and take four year to complete. Each year the cost is 25,000. We find the PV of this expense at the end of year 16. This an annuity of value 25,000, period 4 years and interest ...

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