Question

Beginning three months from now, you want to be able to withdraw $2,300 each quarter from your back account to cover college expenses over the next four years. If the account pays .45 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years?

Answer 1

$36,450.46

Explanation:

The amortization formula can be used to figure this. For quarterly payment A, the principal invested must be P for interest rate r and compounding n times per year for t years.

A = P(r/n)/(1 -(1 +r/n)^(-nt))

2300 = P(0.0045/4)/(1 -(1 +0.0045/4)^(-4·4))

2300 = P·0.06309934

P = 2300/0.06309934 = 36450.46

You need $36,450.46 in your account today so that you can withdraw $2300 quarterly for 4 years.