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Suppose new parents want to start a college fund for their child. They are willing to invest $2000 per year at a rate of 4%.

a. Future Value (FV) = $2000 * (1 + 0.04)ᵗ
b. Present Value (PV) = $2000 / (1 + 0.04)ᵗ
c. Annual Payment (A) = $2000 * (1 + 0.04)
d. Interest Rate (r) = 4%

1 Answer

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Final answer:

The question involves calculating future value, present value, annual payment, and interest rate for a college fund. I provide step-by-step explanations for each aspect.

Step-by-step explanation:

The question you provided involves calculating the future value, present value, annual payment, and interest rate in the context of investing money for the college fund of a child. Let me break down each part:

a. Future Value (FV) = $2000 * (1 + 0.04)ᵗ: This formula calculates the value of the investment after a certain number of years, given an annual deposit of $2000 and an interest rate of 4%. The exponent 't' represents the number of years of investment.

b. Present Value (PV) = $2000 / (1 + 0.04)ᵗ: This formula calculates how much money needs to be invested initially in order to achieve a desired future value. In this case, it calculates the initial deposit needed to reach an FV of $2000 after 't' years.

c. Annual Payment (A) = $2000 * (1 + 0.04): This formula calculates the total amount of money that will be deposited each year, including the original $2000 and the interest earned.

d. Interest Rate (r) = 4%: This represents the annual interest rate being applied to the investment.

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