Question

You want to provide spending money for your 4 year old during their college years. You can afford to deposit $600/year for the next 4 years. You would like to give your child $4,000 per year for in their 18th, 19th, 20th, and 21st birthdays for a total of $16,000. Assuming 5% interest, what uniform annual investment will you have to make on the child's 8th through 17th birthdays to meet this goal? (Assume that at the end of the 17th year, you pull all of the money out of your account in preparation for the gifts).

Answer 1

N = 4, PV = 0, PMT = 600, rate = 5% use FV function in Excel

value after 4 years = 2,586.075

now calculate the value of the investment required when the chlild is 18

N = 4, PMT = 4000, rate = 5%, FV = 0, use PV function in Excel

amount required for gift when the child is 18 = 14,183.8020

this becomes the future value of the investments from 8th birthday to 17th brthday

FV = -14,183.8020, PV = 2586.075, N = 10, rate = 5%

use PMT function in Excel

annual investment required = 792.77