5-40      REQUIRED ANNUITY PAYMENTS A father is now planning a savings program to put his daughter through college. She is 13, she plans to enroll at the university in 5 years, and she should graduate in 4 years. Currently, the annual cost (for everything—food, clothing, tuition, books, transportation, and so forth) is $15,000, but these costs are expected to increase by 5% annually. The college requires that this amount be paid at the start of the year. She now has $7,500 in a college savings account that pays 6% annually. Her father will make six equal annual deposits into her account; the first deposit today and the sixth on the day she starts college. How large must each of the six payments be? [Hint: Calculate the cost (inflated at 5%) for each year of college and find the total present value of those costs, discounted at 6%, as of the day she enters college. Then find the compounded value of her initial $7,500 on that same day. The difference between the PV costs and the amount that would be in the savings account must be made up by the father’s deposits, so find the six equal payments (starting immediately) that will compound to the required amount.]

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

5-40      REQUIRED ANNUITY PAYMENTS A father is now planning a savings program to put his daughter through college. She is 13, she plans to enroll at the university in 5 years, and she should graduate in 4 years. Currently, the annual cost (for everything—food, clothing, tuition, books, transportation, and so forth) is $15,000, but these costs are expected to increase by 5% annually. The college requires that this amount be paid at the start of the year. She now has $7,500 in a college savings account that pays 6% annually. Her father will make six equal annual deposits into her account; the first deposit today and the sixth on the day she starts college. How large must each of the six payments be? [Hint: Calculate the cost (inflated at 5%) for each year of college and find the total present value of those costs, discounted at 6%, as of the day she enters college. Then find the compounded value of her initial $7,500 on that same day. The difference between the PV costs and the amount that would be in the savings account must be made up by the father’s deposits, so find the six equal payments (starting immediately) that will compound to the required amount.]




 

 

 

 

 

Expert Solution
steps

Step by step

Solved in 2 steps with 5 images

Blurred answer
Knowledge Booster
Annuity
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education