Question

Your daughter will start college one year from today, at which time the first tuition payment of \$58,000$58,000 must be made. Assuming that tuition does not increase over time and that your daughter remains in school for four years, how much money do you need today in your savings account, earning 5\%5% per annum, in order to make the tuition payments over the next four years ? *Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision

Answer 1

Total amount needed today in the Savings A/c should be 204740.

Explanation:

We have the following information available to us,

Rate of interest(r) = 5% p.a

Total Future Value(FV) = $58000 \times 4$ = 232000

No. of years(n) = 4 years

Now,The amount of money needed today in our savings A/c can be calculated as follows -

Present Value(PV) = $FV \times [ \dfrac{1}{1+r}]^n$

Year             Amount          Interest(5% p.a)              Present Value

1                   58000                  0.95                               55100

                                                {$[\dfrac{1}{1+0.05}]^1$}

2                  58000                  0.90                                52200

                                                {$[\dfrac{1}{1+0.05}]^2$}

3                  58000                   0.86                               49880

                                                {$[\dfrac{1}{1+1.05}]^3$}

4                   58000                 0.82                                47560  

                                                 {$[\dfrac{1}{1+0.05}]^4$}  

                                                                                                               

                     232000                                                       204740

                                                                                                                 

Therefore,the total amount needed today in our Savings A/c should be Rs.204740.