Question

Our daughter will start college one year from today, at which time the first tuition payment of 58,000 must be made. Assume that tuition does not increase over time and that your daughter remains in school for four years. How much money do you need today in your savings account, earning 5

Answer 1

To find out how much money is needed today to cover four years of college tuition payments at $58,000 per year with a 5% discount rate, we use the present value formula for an annuity.

Step-by-step explanation:

The question involves calculating the present value (PV) of a series of four annual tuition payments of $58,000, assuming a 5% discount rate. Using the formula for the present value of an annuity, the equation is PV = PMT × ​[​1 - (1 + r)^(-n)] / r, where PMT is the annual payment (tuition), r is the discount rate (0.05 for 5%), and n is the number of years (4 in this case). We can calculate that the amount needed in savings today is PV = $58,000 × [​1 - (1 + 0.05)^(-4)] / 0.05.