A. It is estimated that 18 years from now college tuition at the University of Hartford will be $42,000 per year. If your child is born today, how much will you need to put away per year, at end of each year through your child's 18th birthday, so that no additional payments need to be made after year 18? Assume i = 3%.
B. Assume the same parameters as A., but now assume that after year 18, tuition will increase $1,500 per year.
C. Check your answer to B. above by computing the same figure using a different method.
Geometric Gradient Problem
The day your child is born you decide that on each birthday (beginning at the first birthday) you're going to put money away for the child's college tuition. The money will be put in a special education account that pays 5% annually. Tuition today is $25,000 per year. Education experts estimate that over the next 25 years higher education costs will increase at an average annual rate of 2% per year. How much money must you deposit in the education account every year so that at the end of the 18th year there will be sufficient funds on deposit to pay for four years of college without making any further deposits?
To confirm your answer, solve this problem in by using two different approaches.