Answer:
Annual deposit= $3,463.37
Explanation:
Giving the following information:
Tuition costs $12,000 per year in today's dollars.
Number of years= 18
She will go to school for 5 years.
Stephanie can earn 12% on her investments and tuition inflation is 6%.
First, we need to calculate the cost of each year and the total cost.
FV= PV*(1+i)^n
Year 1= 12,000*1.06^18= 34,252.07
Year 2= 34,252.07*1.06= 36,307.12
Year 3= 38,485.55
Year 4= 40,794.68
Year 5= 43,242.36
Total= 193,081.78
Now, we can determine the annual deposit required:
FV= {A*[(1+i)^n-1]}/i
A= annual deposit
Isolating A:
A= (FV*i)/{[(1+i)^n]-1}
A= (193,081.78*0.12) / [1.12^18)-1]
A= 3,463.37
