Quandaries
and Queries
Fran will begin attending longview college 1 year from now and will attend for the next 4 years. Her annual cost will be $14,000.00 which her parents have agreed to pay. Frans parents have saved enough money to meet Frans needs. How much must they invest in an account paying 10% interest compounded annually in order to receive $14,000.00 at the end of each of the next 4 years, having nothing left in the account at the end of that time?
Hi Thomas,
At the beginning of Fran's last year of college her parents will need $14,000 for her final year's expenses. To obtain this they will need to invest a certain amount, $A, at the beginning of her third year at 10% for one year. Thus
A
1.10 = $14,000
and hence
A = $14,000/1.10 = $12,727.27
Thus at the beginning of Fran's third year they need $14,000 for her expenses in the third year and $12,727.27 to invest for her fourth year. Therefore they need
$14,000 + $12,727.27 = $26,727.27
How much will they have to invest at the end of Fran's second year to earn $26,727.27 in one year?
Penny