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?

a. $6,470.
b. $6,105.
c. $11,110.
d. $5,924.

Answer 1

To determine how much Lucy and Fred need to deposit annually for their baby's college fund to reach $200,000 in 18 years at a 6% interest rate, we use the present value annuity formula. By substituting the known values into this formula, we can solve for the annual payment.

Step-by-step explanation:

The question at hand requires us to calculate how much money Lucy and Fred must deposit at the beginning of each year to reach their goal of $200,000 in eighteen years with an annual interest rate of 6%. This is a problem of finding the annuity payment in a present value annuity formula.

By using the present value of an annuity formula, PV = PMT [(1 - (1 + r)^-n) / r], where PV is the target amount ($200,000), PMT is the payment we want to find, r is the annual interest rate (0.06), and n is the number of periods (18 years), we can solve for PMT. After substituting the known values and solving for PMT, we get the correct payment that should be made each year.