A parent can invest $10,000 into a college education fund andreceive $50,000 in 18 years,...

A parent can invest $10,000 into a college education fund and receive $50,000 in 18 years, or the parent can invest $10,000 into an account which earns 12% compounded annually. Determine the annual rate of return for the first option and determine which option the parent should choose.

Expert Solution

Formula:

Future value= present value(1+r)^n

r= interest rate for the period.

n = number of periods.

1.

50,000 = 10,000*(1+r)^18

r= 9.35%

2

FV = 10,000*(1.12)^18

FV = 76,899.66 = $76,900.

The return in option 1 is 9.35% &

Option 2 is better as it's Future value is higher.

jeff jeffy answered 2 years ago

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