Question

You have $65,000 to invest today for your child’s education. You believe you will need $175,000 in 12 years when they enter college. What rate of return do you need to earn on your initial investment of $65,000 to meet your objective in 12 years?

Answer 1

Ans:- we will use the RATE function of excel to calculate the rate of return.

Nper = 12, Pmt = 0, PV = -$65,000, FV = $175,000

Therefore, the rate of return needed to meet the objective will be 8.60%.

Alternative method:- FV = PV (1+r)^n, where FV is the future value, r is the rate of return, and n is the number of years.

$175,000 = $65,000 (1+r)^12

(1+r)^12 = $175,000 / $65,000 or r = ($175,000 / $65,000) ^1/12 - 1 = 0.0860 = 8.60%.

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