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Julio is planning to save for his newborn daughter's college tuition, to be paid in 18...

Julio is planning to save for his newborn daughter's college tuition, to be paid in 18 years. The amount he wishes to have by that time is $65,000. He plans to deposit $2,500 in a bank account every year for 18 years, starting next year. Suppose the account pays 2% interest on deposits, compounded annually. How much would he need to deposit right now, to make up the remaining amount necessary by the end of 18 years?

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Answer #1

Future value of annuity=Annuity[(1+rate)^time period-1]/rate

=2500[(1.02)^18-1]/0.02

=2500*21.4123124

=$53530.781

Hence difference in amount needed at end of 18 years=65000-53530.781

=$11469.219

Hence amount to be deposited right now=11469.219*Present value of discounting factor(rate%,time period)

=11469.219/1.02^18

=11469.219*0.700159375

=$8030.28(Approx).

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