It is estimated that the cost for the first year of college at Massive University, the state school with the best operations management program, will be $60,000 by the time your son is ready to enroll as a student. If prevailing interest rates will average 5 percent, what amount should you invest now to pay his first year's tuition eight years from now?
A) less than $35,000
B) between $35,000 and $38,000
C) between $38,000 and $41,000
D) more than $41,000

Question

Quizplus · Accepted Answer

To determine how much should be invested now, we need to use the future value formula. 
FV = PV(1 + r)^n 
where FV is the future value, PV is the present value, r is the interest rate per period, and n is the number of periods. 
In this case, n is 8 (since we need to pay for college in 8 years), r is 5% (as given in the problem), and FV is $60,000. 
We need to solve for PV. Rearranging the formula, we get: 
PV = FV / (1 + r)^n 
Plugging in the values, we get: 
PV = $60,000 / (1 + 0.05)^8 
PV = $38,155.10 (rounded to the nearest cent) 
Therefore, the amount that should be invested now to pay for the first year's tuition is between $38,000 and $41,000. The correct answer is C.

It Is Estimated That the Cost for the First Year