Question

Soojeong estimates that it is going to take $180,000 to send her new born baby to college. She would like to start an annuity so that she can have $180,000 after 18 years. If the account earns 5.5% interest compounded monthly, how much must she put in each month?

Answer 1

Monthly deposit= $489.59

Explanation:

Giving the following information:

Future Value (FV)= $180,000

Number of periods (n)= 18*12= 216

Interest rate (i)= 0.055 / 12= 0.004583

To calculate the monthly deposit, we need to use the following formula:

FV= {A*[(1+i)^n-1]}/i

A= monthly deposit

Isolating A:

A= (FV*i)/{[(1+i)^n]-1}

A= (180,000*0.004583) / {[(1.004583)^216] - 1}

A= $489.59