Question

A father wants to invest a sum of money (P) into an account today (at time 0), on his son’s birth, so that the son can withdraw 10,000 TL at the start of each of 18^th, 19^th, 20^th, and 21^st year birthday to cover his college expenses for 4 years. How much should the father invest into the bank now if the bank pays 12% per year?

(Draw the cash flow and show all solutions).

1. 30,375 TL                  b) 5,425 TL                c) 4,425 TL                d) 75,625 TL

Answer 1

To withdraw 10,000 each for 4 years starting from his son's 18th bithday, his father has to accumulate 30,374 at an interest rate of 12%

This can be calcuated by PV function in EXCEL

PV(rate, nper, pmt,fv,type)

PV(12%,4,-10,000,0,0)

30,374

His father has to accumulated this much in the time of 17 years. How much he hs to deposit can be found by discounting 30,374 with bank rate of 12%

amount has to invested at 0=30,374/(1.12)^17

Investment amount= 4,424 TL

Option C is correct