Question

Suppose the total cost of a college education will be $50,000 in 12 years for a child. The Parents have $5,000 to invest today. What rate of interest must they earn on investment to cover the cost of child"s education?

O a. 19.2%
O b. 21.15%
O c. 25.1%
O d. 12%

Answer 1

Step-by-step explanation:

The correct answer is c. 25.1%. This can be calculated by using the formula for compound interest: A = P(1+r/n)^nt, where A is the amount of money needed, P is the initial principal, r is the annual interest rate, n is the number of times the interest is compounded each year, and t is the number of years. In this case, we know that A = $50,000, P = $5,000, n = 1, and t = 12. Solving for r we get:

r = (50,000/5,000)^(1/12)-1 = 25.1%.

Therefore, the parents must earn an annual interest rate of 25.1% to cover the cost of their child's education.