Question

Ann and Tom want to establish a fund for their grandson's college education. What lump sum must they deposit at an 8% annual interest rate, compound annually, in order to have $40,000 in the fund at the end of 10 years?

Answer 1

$18,527.74

Explanation:

Each year, the fund amount is multiplied by 1+8% = 1.08. After 10 years, it will have been multiplied by that factor 10 times, 1.08^10. For some principal P deposited now, we want ...

P(1.08^10) = $40,000

P = $40,000/1.08^10 ≈ $18,527.74