Question

Susan and Charles want to begin saving for their baby's college education. They estimate that they will need $225000 in eighteen years. If they are able to earn 5% per annum, how much must be deposited at the beginning of each of the next eighteen years to fund the education

Answer 1

$7,998 must be deposited at the beginning of each of the next eighteen years to fund the education

Step-by-step explanation:

A constant payment for a specified period is called annuity. It is a value which includes the discounted impact on the investment and its interest earning after some specific time period.

The future value of the annuity can be calculated using a required rate of return.

Formula for Future value of annuity is

F = P x ([1 + I]^N - 1 )/I

F = Future value

P =Payment amount

I = interest rate

N = Number of periods

As we have the Future value of the Fund, we need to calculate the payment amount

$225,000 = P x ([1 + 5%]^18 - 1 )/5%

$225,000 = P x 28.13238

P = $225,000 / 28.13238

P = $7,997.90 = $7,998