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Sample_Savings_Question

# Sample_Savings_Question - Sample Saving/Spending...

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Sample Saving/Spending Problem (From Recitation 3/13) This is an adaptation of the college saving problem done in class. However, for this example I will only have one child and the parents will have nothing saved yet. This scenario change reduces the number of needed equations from 4 to 2. Here is the question: How much would parents needs to save on an end-of-every-month basis if their daughter was going to college in exactly 8 years and they wanted to cover 100% of her expenses for four years. Assume the current cost of college is \$20k per year, due at the beginning of the year, cost is expected to increase 5% per year, and their expected return on their investment is 10% EAR. I will set this problem up three ways: Method 1) Aligning all cash flows at T 8 (this is the most direct method, but might not always be feasible) Method 2) Aligning all cash flows at T 0 Method 3) Aligning all cash flows at T 12 Method 1) Step 1) Solve for PMT 1 of the four year college annuity.

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Sample_Savings_Question - Sample Saving/Spending...

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