College savings account to pay for college and automobile

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f. Brock and Betsy's daughter Abby just turned 6 years old today and they decided to plan for her education and automobile costs. Abby is expected to start college 12 years from today on her 18th birthday. Brock and Betsy want to plan for 4 years of college and estimate it will take $39,000 each year (at the start of each year) for each of the 4 years to pay for the education. In addition, Brock and Betsy plan to buy Abby a really nice car at an estimated cost of $30,000 on her 19th birthday (she cannot have a car on campus until she is a sophomore). Brock and Betsy plan to deposit $20,000 today (on Abby's 6th birthday) in a stock fund that they expect to earn a return of 7 percent up until Abby's 18th Birthday, at which time they plan to sell the stock fund and put all of the proceeds into a college savings account for Abby's education and automobile costs. In addition, on each of Abby's 7th through 18th birthdays, Brock and Betsy expect to annually deposit $8,000 into this same college savings account. Assuming the college savings account will earn a 4% interest rate while Abby is in college, what interest rate must the college savings account earn during the next 12 years in order to make the withdrawals necessary from the college savings account to pay for college and automobile costs?

Reference no: EM13695410

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