Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs average $20,000 per year. On average, tuition and other costs have historically increased at a rate of 6% per year. Assuming that college costs continue to increase an average of 6% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 20 to pay for all four years of her undergraduate education is closest to .

$256,571

Explanation:

College Graduation fee for four years in the present value

PV = $20,000 x 4 = $80,000

As historically the fee has risen by 6% we need to find future value when the baby will be 20 years old by using future value formula

Let's say

FV = Future value

PV = Present value

n   = number of years

i     = Interest

Workings

FV = PV x ((1+growth rate)^n)

FV = $80,000 x ( (1+0.06)^20)

FV = $256,571

As the bank interest rate is 8% the saving need to be deposited annualy can be calculated as

Savings = (FV x i) /  ((1+i)^n)-1)

Savings = ($256,571 x 0.08) / ((1+0.08)^20)-1)

Savings = 20,525.68 / 3.66

Savings = $5,608

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