John and Daphne Are Saving for Their Daughter Ellen's College

question 56

Multiple Choice

John and Daphne are saving for their daughter Ellen's college education.Ellen just turned 10 (at t = 0) ,and she will be entering college 8 years from now (at t = 8) .College tuition and expenses at State U.are currently $14,500 a year,but they are expected to increase at a rate of 3.5% a year.Ellen should graduate in 4 years--if she takes longer or wants to go to graduate school,she will be on her own.Tuition and other costs will be due at the beginning of each school year (at t = 8,9,10,and 11) . So far,John and Daphne have accumulated $18,000 in their college savings account (at t = 0) .Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1,2,3,and 4) .Then they plan to make 3 equal annual contributions in each of the following years,t = 5,6,and 7.They expect their investment account to earn 9%.How large must the annual payments at t = 5,6,and 7 be to cover Ellen's anticipated college costs?

• A) $614.04
• B) $673.22
• C) $739.80
• D) $813.78
• E) $880.36

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Definitions:

Agency Coupled

A relationship where an agent is given an interest in the property of the principal, making the agency irrevocable for a specified period.

Principal's Benefit

The advantages or profits derived by an individual who has authorized another (an agent) to act on their behalf.

Disclosed

Revealed or made known, often referring to information that was previously private or confidential.

Implied Warranty

A legal guarantee that a product will meet a minimum set of standards of quality and functionality without being explicitly stated.