Jim and Elsie are saving for their granddaughter Amy’s college education. Amy just turned 12 (at t...

70.2K

Verified Solution

Question

Finance

Jim and Elsie aresaving for their granddaughter Amy’s college education. Amy justturned 12 (at t = 0), and she will be entering college 6 years fromnow (at t = 6). College tuition and expenses at Sam Houston StateUniversity are currently $15,000 a year, but they are expected toincrease at a rate of 2% a year. Amy should graduate in 4 years--ifshe takes longer or wants to go to graduate school, she will be onher own. Tuition and other costs will be due at the beginning ofeach school year (at t = 6, 7, 8, and 9).

So far, Jim and Elsie have accumulated $30,000 in their collegesavings account (at t = 0). Their long-run financial plan is to addan additional $5,000 in each of the next 3 years (at t = 1, 2, and3). Then they plan to make 3 equal annual contributions in each ofthe following years, t = 4, 5, and 6. They expect their investmentaccount to earn 6%. How large must the annual payments at t = 4, 5and 6 be to cover Amy's anticipated college costs? (Note:1.5x Credit)
$375.85
$730.68
$881.22
$4,063.96
$12,191.88

Answer & Explanation Solved by verified expert

4.1 Ratings (850 Votes)

The scenario considers three different cash flows The first cash flow stream are the deposits at t1 t2 and t3 each worth 5000 The second cash flow stream are the planned equal installment deposits at t4 t5 and t6 The third cash flow stream are the withdrawals for See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Jim and Elsie aresaving for their granddaughter Amy’s college education. Amy justturned 12 (at t = 0), and she will be entering college 6 years fromnow (at t = 6). College tuition and expenses at Sam Houston StateUniversity are currently $15,000 a year, but they are expected toincrease at a rate of 2% a year. Amy should graduate in 4 years--ifshe takes longer or wants to go to graduate school, she will be onher own. Tuition and other costs will be due at the beginning ofeach school year (at t = 6, 7, 8, and 9).So far, Jim and Elsie have accumulated $30,000 in their collegesavings account (at t = 0). Their long-run financial plan is to addan additional $5,000 in each of the next 3 years (at t = 1, 2, and3). Then they plan to make 3 equal annual contributions in each ofthe following years, t = 4, 5, and 6. They expect their investmentaccount to earn 6%. How large must the annual payments at t = 4, 5and 6 be to cover Amy's anticipated college costs? (Note:1.5x Credit)$375.85$730.68$881.22$4,063.96$12,191.88