Question

A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $14,000 each, with the first payment occurring today on your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will provide $25,000 per year for four years. What return is this investment offering?

Answer 1

Answer:

Ans. the rate of return of this invesment is 3.5278% annual.

Explanation:

Hi, what we need to do here is to find the future value of all six payments, beginning when the child turns 12, which will end when he turns 17. One year later (when the child turns 18) he will receive $25,000 per year, for the next 4 years. This is the equation that we need to use (and solve for "r").

$\frac{A_{1}((1+r)^{6}-1) }{r} =\frac{A_{2}((1+r)^{4}-1) }{r(1+r)^{4} }$

Where:

A1=$14,000

A2=$25,000

So, everything should look like this

$\frac{14,000((1+r)^{6}-1) }{r} =\frac{25,000((1+r)^{4}-1) }{r(1+r)^{4} }$

As you can see, this would take forever to solve, so what we have to do is to use MS Excel, we have to use the "Goal Seek" function. Please check the MS Excel spread sheet attached to this answer.

Please use this function with the following parameters.

Set Cell: G7

To Value: 0

By changing cell: G2

Ans. 3.5278%

Best of luck.

Download xlsx