Question

Your parents are giving you $100 a month for four years while you are in college. At a 6 percent discount rate, what are these payments worth to you when you start college? Round to the nearest cent. Do not include any unit (If your answer is $111.11, then type 111.11 without $ sign.) what is the answer to this??

Answer 1

The worth of the payments made at the start of the college is the Future Value of annuity regular/Ordinary annuity and it is calculated by using the following formula

Future Value of an Annuity Regular = P x [{(1+ r)ⁿ - 1} / r ]

Monthly Payment (P) = $100 per month

Monthly Interest Rate (r) = 0.50% [6% / 12 months]

Number of months (n) = 48 Months [4 Years x 12 Months]

Future Value of an Annuity Regular = P x [{(1+ r)ⁿ - 1} / r ]

= $100 x [{(1 + 0.0050)⁴⁸ – 1} / 0.0050]

= $100 x [(1.270489 – 1) / 0.0050]

= $100 x [0.270489 / 0.0050]

= $100 x 54.0978

= $5,409.78

“Therefore, the worth of the payments made at the start of the college would be $5,409.78”