Some friends of yours have just had a child. Thinking ahead, andrealizing the power of compound interest, they are consideringinvesting for their child’s college education, which will begin in18 years. Assume that the cost of a college education today is$150,000. Also assume there is no inflation and no tax on interestincome used to pay college tuition and expenses.
Instructions: Enter your responses rounded tothe nearest dollar.
a. If the interest rate is 3 percent, how much money will yourfriends need to put into their savings account today to have$150,000 in 18 years?
They would need to put $Â Â Â into their savingsaccount today.
b. What if the interest rate were 7 percent?
They would need to put $Â Â into their savings accounttoday.
c. The chance that the price of a college education will be thesame 18 years from now as it is today seems remote. Assuming thatthe price will rise 4 percent per year, and that today’s interestrate is 8 percent, what will your friends' investment need tobe?
The amount of the investment would be $Â Â .
d. Return to the case with a 3 percent interest rate and noinflation (part a). Assume that your friends don’t have enoughfinancial resources to make the entire investment at the beginning.Instead, they think they will be able to split their investmentinto two equal parts, one invested immediately and the secondinvested in five years. What is the amount of each part?
The required size of the two investments would be$Â Â .
