TVM question - 2 interest rates in Question
Q: Couple is saving for child’s tuition for 4 years starting 18 yrs from now. current annual cost of college is 7K, and is expected to rise at an annual rate of 5%. In planning, couple assumes they can earn 6% annually. How much must they put aside each year starting next year, if they plan to make 17 equal payments?
I understand finding the future value of each tuition payment at 18, 19, 20, and 21, and then using the PV formula to equate the tuition payments back to t = 17, BUT shouldn’t the rate used for the PV formula be 5% to find the PV of the tuition payments at t = 17??? The book uses 6%, but my understanding is that is what the couple CAN earn, but what they NEED is what tuition will actually cost and in that case it will only rise by 5%.
Please let me know where I’m missing something. Thanks for any help you can offer.
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