Question

A couple plans to save for their child's college education. What principal must be deposited by the parents when their child is born in order to have $44,000 when the child reaches the age of 18? Assume the money earns 5% interest, compounded monthly.

Answer 1

$17,922.55

Explanation:

The future value of a one-time investment is calculated using the formula ...

FV = P(1 +r/n)^(nt)

where principal P is invested at annual rate r compounded n times per year for t years.

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You have FV = 44000, r = 0.05, n = 12, t = 18, and you want to find P.

44000 = P(1 +0.05/12)^(12·18) ≈ 2.455008P

P = 44000/2.455008 = 17,922.55

The couple must deposit $17,922.55 in order to have $44,000 in 18 years.

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Additional comment

Some calculators, all spreadsheets, and a number of apps can make this calculation for you. All you must do is fill in the numbers.