Question

Lucy and Fred want to begin saving for their baby's college education. They estimate that they will need $200,000 in eighteen years. If they are able to earn 6% per annum, how much must be deposited at the beginning of each of the next eighteen years to fund the education?

Answer 1

Answer:

The payment should be of:  $ 6,105

Explanation:

We need to sovle for the annuity-due quota which, generates a 200,000 future value capitalize at 6% per annum:

As this is an annuity due a (1+r) factor is added to the annuity formual to represent this addtional captialziation of the first payment.

$PV \div \frac{(1+r)^{time} -1}{rate}(1+r) = C$

PV 200,000

time: 18 years

rate: 6% = 6/100 = 0.06

$200000 \div \frac{(1+0.06)^{18} -1}{0.06}(1+0.06) = C$

C  $ 6,105.008