Beginning three months from now, you want to be able to withdraw $2,700 each qua

Question

Beginning three months from now, you want to be able to withdraw $2,700 each quarter from your bank account to cover college expenses over the next three years. If the account pays 0.49 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next three years?

Beginning three months from now, you want to be able to withdraw $2,700 each quarter from your bank account to cover college expenses over the next three years. If the account pays 0.49 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next three years?

Explanation / Answer

Explanation:

The cash flows are simply an annuity with four payments per year for three years, or 12 payments. We can use the PVA equation:

PVA = C({1 ? [1/(1 + r)t]} / r)

PVA = $2,700{[1 ? (1/1.0049)12] / 0.0049}

PVA = $31,391.23

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