Question

Ann and Tom want to establish a fund for their grandson's education. what lump sum must they deposit at a 7% annual interest rate compounded monthly in order to have $60,000 in the fund at the end of 10 years?

Answer 1

Formula to calculate Principal with clompound interest:

$\begin{gathered} P=\frac{A}{(1+\frac{r}{n})^{n\cdot t}} \\ \\ A=\text{Amount} \\ r=\text{Interest rate (decimals)} \\ n=\text{ number of times per unit t} \\ t=time \end{gathered}$

For the given situation:

A= 60,000

r= 7% =7/100= 0.07

n= 12 (as it is compounded monthly and a year has 12 months)

t= 10 years

$\begin{gathered} P=\frac{60,000}{(1+\frac{0.07}{12})^{12\cdot10}} \\ \\ =\frac{60,000}{(1+\frac{0.07}{12})^{120}} \\ \\ \approx29,855.78 \end{gathered}$

Then, they must deposit approximately $29,855.75