Assignment:
John and Daphne are saving for their daughter Ellen's college education. Ellen is now 10 years old and will be entering college 8 years from now (t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. They expect Ellen to graduate in 4 years. (If Ellen wants to go to graduate school, she will be on her own.) Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11).
So far, John and Daphne have accumulated $15,000 in the college savings account. Their long-run financial plan is to add an additional $5,000 at the beginning of each of the next 4 years (at t = 0, 1, 2, and 3). Then they plan to make 5 equal annual contributions at the end of each of the following 5 years (t = 4, 5, 6, 7, and 8). They expect their investment account to earn 9%. How large must the annual payments be at t = 4, 5, 6, 7, and 8 to meet Ellen's anticipated college costs?
a) $777.96
b) $818.91
c) $862.01
d) $907.38
e) $955.13