Question

Your parents have accumulated a $170,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giving Courtney $26,000 to help her get started, and they have decided to take year-end vacations costing $12,000 per year for the next four years. Use 6 percent as the appropriate interest rate throughout this problem.
a. How much money will your parents have at the end of four years to help you with graduate school, which you will start then?

b. You plan to work on a master's and perhaps a PhD. If graduate school costs $26,660 per year, approximately how long will you be able to stay in school based on these funds?

Answer 1

Answer:

A) $121,192

B) 4.5 years

Explanation:

A) The parents had $170,000, but gave $26,000 to Courtney, and spent $48,000 in vacations during for years.

For all purposes, the initial invested amount is now:

170,000 - 26,000 - 48,000 = 96,000

They invest that amount for four years under an interest rate of 6%. Using the future value of an investment formula, we can find the future value of this amount:

X = $96,000 (1 + 0.06)^4

X = $121,192

So, the answer for a) is $121,192

B) If each graduate school year costs $26,660, dividing the two numbers we obtain:

121,192 / 26,660 = 4.5

So you will be able to stay in graduate school for 4.5 years.