Question

Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education? 13.99 percent 11.08 percent 10.40 percent 12.65 percent 14.62 percent

Answer 1

WE have present invest amount =$ 40000

Required amount =$ 325,000

Time period = 16 years

what we need at of interest at which we will $ 325,000 after 16 years by investing $ 40000

we can find out the rate of interest by using the the following formula.

FV=PO(FVIF i,n) FV= Future Value , PO= present Value, i = rate interest and n= no of years . By replacing the figures, but we donot the I i.e interest.

325,000=40000(FVIFi,16)

FVIFi,16= 325,000/40000

FVIFi,16=8.125 when we look in the table of FVIF in the year 16 we find 8.137 the very nearby amount to our 8.125 in the 14% rate interest column.

so because 8.137 is little bit higher than our answerd amount 8.125 so the rate interest is little bit lower than the 14%

i.e 13.99 is the right answer that is given in our problem.

so the applicable rate of interest that will be charged on $ 40000 to get $ 325,000 is 13.99%