Question

In: Finance

Judge Drago has decided to set up an educational fund for his favorite granddaughter, Emma, who...

Judge Drago has decided to set up an educational fund for his favorite granddaughter, Emma, who will start college in one year. The judge plans to deposit an amount in a savings account that pays 9% annual interest. He wants to deposit an amount that is sufficient to permit Emma to withdraw $21,200 for tuition starting in one year and continuing each year for a total of four years. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

How much should he deposit today to provide Emma with a fund to pay for her college tuition? (Round your answer to nearest whole dollar.)

Expert Solution

Solution:

The values provided in the question are as follows:

The interest rate is 9% per annum.

The amount to withdraw first after one year is $21,200.

The total number of years the amount to withdraw each year is 4 years.

The formula to calculate the present value (PV) as on today is as follows:

PV as on today = Future value * PVAF (r%, n years)

= $21,200 * PVAF (9%, 4)

= $21,200 * 3.2397

= $68,681.64 or $68,682

r is the rate of interest on per annum basis expressed in %.

n is the number of years.

PVAF is the present value annuity factor.

Hence, the amount to be deposited as on today in order to withdraw after one year and continue for four years is $68,682.

Note: The formula to calculate the PVAF is as follows:

PVAF = 1 / (1 + r)1 + . . . . . . . + 1 / (1 + r)n

jeff jeffy answered 1 year ago

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