Carol is planning for her son's college education to begin five years from today. She estimates the yearly tuition, books, and living expenses to be $5,000 per year for a four-year degree. How much must Carol deposit today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four years of college?

Question

Quizplus · Accepted Answer

To solve this, we use the present value of an annuity formula, which calculates how much money Carol needs to deposit today to meet her future cash outflows (the $5,000 per year for four years). The formula considers the interest rate and the number of periods. Given an 8% interest rate and payments over four years, the calculation will show that Carol needs to deposit $11,277 today.

Carol Is Planning for Her Son's College Education to Begin