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Charges grow at the recent education inflation

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You are saving for your child's college education.  Your child will start college in 16 years, and college tuition is due at the beginning of the year (i.e., the first tuition payment will occur at t=16). Average college tuition at a private school this year is $38,500 per year.  Your opportunity cost of funds is 0.5% per month.

After panicking, you realize that your salary should grow over time, so it will make sense to also grow your contribution to the college account.  You estimate your salary will grow about 0.75% per month, so you want to commit to grow your college contribution at that same rate.  What will be your first monthly payment under this plan for each of the two scenarios?

Scenario 1: Optimistic - tuition charges grow at the general inflation rate of 2.4% per year, compounded monthly.

Scenario 2: Pessimistic - tuition charges grow at the recent education inflation rate of 6.4% per year, compounded monthly.

Reference no: EM133253247

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