Question

A young couple wants to have a college fund that will pay $20,000 at the end of each half-year for 8 years.

(a) If they can invest at 8%, compounded semiannually, how much do they need to invest at the end of each 6-month period for the next 18 years to begin making their college withdrawals 6 months after their last investment? (Round your answer to the nearest cent.)

a. Suppose 8 years after beginning the annuity payments, they
receive an inheritance of $31,000 that they contribute to the
account, and they continue to make their regular payments as found
in part (a). How many college withdrawals will they be able to make
before the account balance is $0? (Round your answer to the nearest
whole number.)

withdrawals

Answer #1

a) Amount required 18 years later can be calculated using PV function

N = 8 x 2 = 16, PMT = 20,000, I/Y = 8%/2 = 4%, FV = 0

=> Compute PV = $233,046

In order to accumulate that corpus, semi-annual payments can be calculated using PMT function

N = 18 x 2 = 36, PV = 0, I/Y = 4%, FV = 233,046

=> Compute PMT = $3,003.23

b) Value of the inheritance at the time of beginning of college is

FV = 31,000 x (1 + 4%)^(10 x 2) = $67,924.82

=> Total Corpus at college beginning = 67,924.82 + 233,046 = $300,971

No. of withdrawals can be calculated using N function

I/Y = 4%, PV = 300,971, PMT = -20,000, FV = 0

=> Compute N = 23.48 payments

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