A couple\'s daughter has just turned seven. They want to set up a savings plan w
ID: 1143493 • Letter: A
Question
A couple's daughter has just turned seven. They want to set up a savings plan whereby each quarter they deposit an amount at 15% compounded quarterly to cover the cost of her college when their daughter turns 18. They estimate that an amount of 17,000 per year in today's dollars will be required for each of the four years of college. (Assume that the 17,000 amounts are paid out on the daughter's birthdays, starting with her 18th birthday.) The inflation rate is assumed to be 10% per year. Determine the uniform quarterly payments that are required if the last payment is made on the daughter's 18th birthday. Enter your answer to the nearest whole number.
Explanation / Answer
A couple's daughter has just turned seven. They want to set up a savings plan whereby each quarter they deposit an amount at 15% compounded quarterly to cover the cost of her college when their daughter turns 18. They estimate that an amount of 17,000 per year in today's dollars will be required for each of the four years of college. (Assume that the 17,000 amounts are paid out on the daughter's birthdays, starting with her 18th birthday.) The inflation rate is assumed to be 10% per year. Determine the uniform quarterly payments that are required if the last payment is made on the daughter's 18th birthday. Enter your answer to the nearest whole number
the real rate of return is 15%-10%= 5%.
calculate using BAII financial calculator
4 payments of 17,000 a year discounted at 5% have a NPV of 60,281.16
we get .
real rate of return is 15%-10%= 5%.
for 4 payments of 17,000 a year discounted at 5% we have a NPV of 60,281.16 ...
If we have 11 years of 5% return quarterly payments to reach 60,281.16, we get a quarterly payment of 1035.97....
so rounding to nearest whole number we get 1036
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