QUESTION 1 Imagine that you are a parent, and your child is going to college in

Question

QUESTION 1 Imagine that you are a parent, and your child is going to college in 4 years. Tuition fees amount to $12,000 a year for each of the 4 years. You plan on depositing a lump sum of money today in a bank account paying 5% interest a year, so that you can make these annual tuition fee payments. The first tuition fee payment you make will be 4 years from now. Calculate how much is the lump sum of money you need to deposit now in order to fund these annual tuition fee payments.. the nearest integer, e.g. enter 12345 if your answer is 12,345.2, enter 12346 if your answer is 12,345.7) (round your answer to

Explanation / Answer

The amount that should be present in the bank after 4 years to pay fees is 12000*4 which is $48000

So the future value to be in the bank is 48000$

Interest on deposit = 5% per annum = 0.04

Number of years we keep deposit = 4

The amount that should be deposited right now to get a future value of 48000 in the bank account is P

P = Present single payment

48000 = P (1+5%)4

48000 = P (1+0.05)4

P = 48000/(1.05)4

P = 39489$

The amount to be deposited now to fund future annual fees is $39489

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