Question

Jessie just inherited $33,715.57 and would like to use it to buy a new car. His parents would like him to use the money for college which Jessie will start in 10 years. His parents expect that his college will cost $17,000.00 per year for 4 years (tuition is due at the end of the year). The interest rate on the savings is 6.00%.

1) How much money will Jessie need for college when he starts in 10 years?

2) How much money will need to be set aside for Jessie's college?

3) How much of the remaining money can be spent on Jessie's new car?

Answer 1

1)

The size of the withdrawal for college expenses is found using the present value of annuity equation

The amount that Jessie will need for college when he starts in 10 years = $58,906.80

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2)

The money to be set aside is found using the future value of investment equation

$ 58,906.80 = Present value ( 1 + 0.06)10

Present value = $ 58,906.80 (1.06)10

Amouunt to be set aside now for college = $ 32,893.25

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3)

The amount remaining to be spent on Jessie's new car = $ 33,715.57 - $ 32,893.25

Amount remaining to be spent on Jessie's new car = $ 822.32