Question

Assume the total cost of a college education will be $245,000 when your child enters college In 15 years. You presently have $108,000 to Invest for this purpose. What rate of Interest must you earn to cover the cost of your child's college education?

a. 5.79 percent
b. 5.50 percent
c. 5.61 percent
d. 6.25 percent
e. 6.81 percent

Answer 1

Answer:

Option (c) is correct.

Explanation:

Given that,

Present value = $108,000

Future value = $245,000

Time period, n = 15 years

$Present\ value = Future\ value\times(\frac{1}{1+i} )^{n}$

$108,000=245,000\times(\frac{1}{1+i} )^{15}$

$0.4408=(\frac{1}{1+i})^{15}$

$0.9469 =\frac{1}{1+i}$

0.9469 + 0.9469i = 1

0.9469i = 1 - 0.9469

0.9469i = 0.0531

i = 0.0531 ÷ 0.9469

i = 0.05607 or 5.61%

Therefore, the rate of Interest must you earn to cover the cost of your child's college education is 5.61%.