Answer:
To achieve their goal, they will need to invest $30,684.111 today
Step-by-step explanation:
The value of money always reduces as time moves due to inflation. Therefor if we were to compare the current value of money now and maybe ten year ago, we notice that the value ten years ago was higher than the current value. It was determined the amount of money used to buy a piece of property now was higher than the amount of money used to buy the same property ten years ago. In our case above, we need to determine the present value of the future cash flows that will be needed to be invested today in order to meet the child's college education. This can be achieved as follows using the formula below;
P.V=C/(1+r)^n
where;
P.V=present value=unknown
C=future cash flows=$20,000 per year
r=rate of return=8%=8/100=0.08
n=number of year
Year Present Value Result
11 {20,000/(1+0.08)^11} 8,577.657
12 {20,000/(1+0.08)^12} 7,943.275
13 {20,000/(1+0.08)^13} 7,353.958
14 {20,000/(1+0.08)^14} 6,809.221
Total=(8,577.657+7,943.275+7,353.958+6,809.221)=$30,684.111
To achieve their goal, they will need to invest $30,684.111 today