Reference no: EM132909061

Albert Einstein reportedly said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." Regardless of whether Einstein uttered these exact words, the essence of his statement is still immensely powerful and cannot be disputed. For anyone who wants to build lasting wealth, understanding and harnessing the power of compound interest is essential. For the more visual of you, imagine, if you will, building the bottom part of a snowman. It starts with a snowball (or initial investment). You roll it around in the snow and it slowly gets bigger (interest on the investment). A slow and monotonous process until something wonderful becomes apparent - the snowball not only gets bigger and bigger, but at a faster and faster rate (interest on the interest). Your friend, Mike Szyslak wants be a millionaire, and he found several ways applicable. But he is still hesitating among the various options and comes to you for financial advice.

Problem 1: Mike starts saving money for his son to pay for his college. Hi son is 2 years old now and he is expected to go to a four year college at age 18. The current college tuition cost is $30,000 per year, and tuition is expected to grow at a constant rate of 3% annually. He plans to save $5000 at the beginning of each year during next 16 years. What would be his expected rate of return so that he can have enough money pay for his son's 4 year college tuition?