Question

Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. you presently have $40,000 to invest and do not plan to invest anything further. what annual rate of interest must you earn on your investment to cover the entire cost of your child's college education?

Answer 1

Future value FV = $325,000 
Investment I = $40,000
 Number of years n = 16
 Annual rate = r
 We have the equation FV = I (1 + r) ^n => 325000 = 40000(1 + r)^16
 (1 + r)^16 = 325 / 40 => 1 + r = (325 / 40) ^ (1/16) => 1 + r = 1.1398
 Rate of Interest r = 1.1398 - 1 = 0.1398 that is 13.98%
 Annual rate of Interest r = 13.98%

Answer 2

Answer:

13.99%

Explanation:

For this question we use the Rate formula that is shown on the attached spreadsheet

Data provided in the question

Present value = $40,000

Future value or Face value = $325,000

PMT = $0

NPER = 16 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this, the annual rate of interest is 13.99%