Your five-year-old daughter has just announced that she would like to attend college. The College Board has reported that the average cost of tuition, room, board, and other expenses at public colleges is $16,140 in the 2010–2011 academic year.¹¹Â The cost has risen 6.1% over the last year. You believe that you can earn a rate of 8% on investments to meet this goal.

a. If costs continue to rise at 6.1% per year, how much will it cost for the first year of tuition in 13 years?

b. Assuming that you plan to have enough money saved in 13 years to cover all four years of college costs, how much will you need to have accumulated by that time? Note that the tuition, room, and board is a graduated annuity growing 6.1% per year, and assume that you will pay all costs at the beginning of each year.

c. If you were to invest a lump sum today in hopes of covering your daughter’s college costs, how much would you have to invest?

d. If you now decided to invest annually instead, how much would you have to invest each year? What if you make investments monthly instead?

e. You just learned of a $10,000 inheritance and plan to invest it in your daughter’s college fund. Given this new source of funds, how much will you now have to invest each year?