A couple has just given birth to a baby and named him Jimmy. They want to start a college savings account for Jimmy and start saving for his college education. The following facts will help you work this problem:
Current Cost of Tution, Room & Board $25,000
Expected Average Inflation 5%
Expected Average Percentage Return on Savings 4%
Years until you need the first tution payment 18
You will make 18 yearly payments with the first one starting a year from now.
1.How much will you need at the end of 18 years to fund Jimmy’s college education for 4 years? Round your answer to a whole number (Example 150450.61 rounded to 150451 with no commas or dollar signs).
Hint: You will need to do a Future Value calculation to determine the cost of education in 18, 19, 20, and 21 years.
2.How much will you need to save each year in Jimmy’s account to reach your goal of having enough money to fund his college education at the end of 18 years? Round your answer to a whole number (Example 1450.61 rounded to 1451 with no commas or dollar signs)
Hint: Use the 4 years of inflated school costs in a NPV calculation to determine the lump sum future goal you are aiming at.