These two part questions are getting me really angry and pissed. Sometimes you have to subtract 1 from N from the second part, because the value is already discounted one back?
Ok, not sure if this question related butt…
A couple plans to pay college tutition for 4 years starting 18 years from now. THe current annual cost of college is $7000, and they expect this cost to rise at an annual rate of 5%. In their planning, they assume they can earn 6 percent annually. How much must they put aside each year, starting next year, if they plan to make 17 equal payments.
Can someone please explain what values to input to their calcuator? I understand the thought. You need to go backwards and first find the PV of how much you need for college. Then that becomes the FV, how much how you need to pay per year. College, im assuming is also paid at in the beginning of the year…
The first year’s tuition is due in 18 years, and the cost will be $7,000, increased 5% per year for 18 years. You can calculate that as:
$7,000 × 1.05^18 = $16,846,
or
PV = 7000
i = 5%
PMT = 0
n = 18
Solve for FV = -$16,846.
That’s the first year’s tuition. The second year’s tuition is $17,689 (= $16,846 × 1.05), the third year’s is $18,573, and the fourth year’s is $19,502. The value of those four tuition payments as of 18 years from now (discounted at 6%) is:
Thanks S2000. WHat was getting tricky was that the colelge tuition was increeasing by a certain percentage, while also having to discount at another percentage.
There’s a formula for the PV of an annuity whose payments grow at a constant rate, but you don’t want to know it. Frankly, I cannot imagine you’ll see anything on the real exam with as much calculation as I did above, and for only four payments the formula is hardly less work that doing it as I did it.