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Question
Assume that you are graduating, that you plan to work for 4 years, and then to go to law school for 3 years. Right now, going to law school would require $17,000 per year (for tuition, books, living expenses, etc.), but you expect this cost to rise by 8 percent per year in all future years. You now have $25,000 invested in an investment account which pays a simple annual rate of 9 percent, quarterly compounding, and you expect that rate of return to continue into the future. You want to maintain the same standard of living while in law school that $17,000 per year would currently provide. You plan to save and to make 4 equal payments (deposits) which will be added to your account at the end of each of the next 4 years; these new deposits will earn the same rate as your investment account currently earns. How large must each of the 4 payments be in order to permit you to make 3 withdrawals, at the beginning of each of your 3 years in law school? (Note: (1) The first payment is made a year from today and the last payment 4 years from today, (2) the first withdrawal is made 4 years from today, and (3) the withdrawals will not be of a constant amount.)
a. $13,242.67
b. $6,562.13
c. $10,440.00
d. $7,153.56
e. $14,922.85
Answer
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