Your daughter is currently eight years old. You anticipate that she will be going to college in 10

QUESTION

Your daughter is currently eight years old. You anticipate that she will be going to college in 10 years. You would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 3% per year, how much money do you need to put into the account today to ensure that you will have $100,000 in 10 years?
Assumption: We are assuming that there are no intermittent payments during the 10 years period. Whatever payment is made, it is made at the end of the 10 years assuming compunding of the interest received per annum. —————————————————————————————————————————————————————————————————

lution: With the above assumption, the money needed to be put in the account today to receive $100000 in 10 years is equal to the present value of the $100000. The opportunity cost of capital in this case is the interest rate of 3%. PV($100000) = ($100000/(1+3%)^10) = $74409.39

ANSWER:

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