Assume That You Just Had a Child,and You Are Now

question 28

Multiple Choice

Assume that you just had a child,and you are now planning for her college education.You would like to make 43 equal payments over the next 21 years (the first payment to be made immediately,all other payments to be made at 6-month intervals,with the final payment to be made at her 21st birthday) so that you will be able to cover her expected expenses while in school.You expect to pay expenses on her 18th,19th,20th,and 21st birthdays.Assume that the current (time period 0) annual cost of college is $6,000,that you expect annual inflation to be 8 percent for the next 5 years,and then 5 percent thereafter.If you expect to be able to earn a return of 4 percent every 6 months on your investments (a simple rate of 8 percent with semiannual compounding) ,what will be the amount of each of the 43 payments?

• A) $705.86
• B) $731.93
• C) $692.15
• D) $650.46
• E) $785.72

---

Definitions:

Margin of Safety Ratio

This ratio measures the difference between actual or expected sales and sales at the break-even point, indicating the buffer against a loss.

Dollar Amount

Refers to the value or cost of something expressed in units of currency.

Break-even Point

The level of production or sales at which total revenues equal total expenses, resulting in no net loss or gain.

Variable Costs

Costs that fluctuate in direct relation to the level of production or volume of operations in a business.