The parents of a child wish to establish a trust fund for the child's college education. If they need an estimated $90,000 5 years from now and they are able to invest the money at 5.5% compounded continuously in the interim, how much should they set aside in trust now?
A) $68,361.49
B) $17,061.61
C) $17,036.73
D) $68,862.09

Question

Quizplus · Accepted Answer

We can use the formula for continuous compounding:
A = Pe^(rt)
where A is the future value, P is the present value, e is the constant 2.71828, r is the interest rate as a decimal, and t is the time in years.

Plugging in the given values:
A = $90,000
r = 0.055  (since 5.5% = 0.055)
t = 5

90,000 = P*e^(0.055*5)
90,000 = P*1.316
P = 90,000/1.316
P = $68,361.49

Therefore, the parents should set aside $68,361.49 in trust now to have enough for their child's college education in 5 years.

The Parents of a Child Wish to Establish a Trust