Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Assuming that the parents have already made the deposit for their daughter's 18th birthday,then the amount available for the daughter's college expenses on her 18th birthday is closest to:

Question

Quizplus · Accepted Answer

This problem can be solved using the formula for the future value of a growing annuity. The formula is: FV = P * [((1 + r)^t - (1 + g)^t) / (r - g)], where P is the initial payment, r is the interest rate, g is the growth rate of the payments, and t is the number of periods. Here, P = $2000, r = 7% or 0.07, g = 5% or 0.05, and t = 18. Plugging these values into the formula gives a future value close to $97,331, which is the amount available for the daughter's college expenses on her 18th birthday.

Suppose That a Young Couple Has Just Had Their First