Question

Beginning three months from now, you want to be able to withdraw $4,200 each quarter from your bank account to cover college expenses over the next four years. If the account pays .82 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years

Answer 1

Answer:

$49,709.34

Explanation:

Payments of fixed amount for a certain period of time is known as an Annuity.

Step 1 : We need to calculate the Net Present Value of the Annuity

Using a financial calculator the following data will need to be captured.

PMT = $4,200

P/Yr = 4

N = 4 x 4 = 12

I = 0.82 %

FV = $ 0

PV = ?

Therefore, the Net Present Value of the Annuity is $49,734.80

Step 2 : Then we calculate the Present Value (Value today of this Annuity)

Since you need to have $49,734.80 in 3 months.

Then, today you require :

FV = $49,734.80

I = 0.82 %

P/Yr = 4

N = 0.25

PMT = $0

PV = ?

therefore,  today you require $49,709.34

Conclusion

We are discounting the payments in both stages by the rate of 0.83 % .Therefore, you need to have in your bank account $49,709.34 today to meet your expense needs over the next four years.