Ms. Wells has a child and wishes to begin saving for Junior's college expenses. Junior will enter college in six years. Assume that Junior will spend 4 years in college, that the real(inflation adjusted) annual cost of a college education will remain at $24,000, that the nominal interest rate is 7.1%, that the expected rate of inflation 5.0%, and that the first college payment is due at time 6 and the last payment is due at time 9. Ms. Wells wants to make 9 annual investments(beginning one year from now and ending 9 years from now) such that the savings will cover the cost of college. Her first investment (at time 1) will be $C(in real terms) and subsequent investments will grow (in real terms) by 1% per year.
terms) by 1% per year.
(a) What is the present value of Junior's college expenses as of time 0?
(b) What initial (real) investment, C, will be required at time 1 if Ms. Wells wishes to exactly cover the college expenses? Show your logic.
(c) What is the (real) amount of her last investment, in year 9?
(d) What is the nominal amount invested in year 1 and year 9?