You setup an educational savings plan that will pay $15,000 to your newborn child in 18 years. If the plan uses a rate of 4.75% per year, what was contributed into this plan?

Question

Quizplus · Accepted Answer

To find the initial contribution for a future value in an educational savings plan, we use the formula for the present value of a single sum, which is $PV = \frac{FV}{(1 + r)^n}$, where $PV$ is the present value or initial contribution, $FV$ is the future value, $r$ is the annual interest rate, and $n$ is the number of years. Plugging in the given values: $PV = \frac{15,000}{(1 + 0.0475)^{18}}$, calculating this gives a present value of approximately $6,506, which is the amount contributed into the plan.

You Setup an Educational Savings Plan That Will Pay $15,000