Question

Your daughter will graduate from college in four years. At that time you would like to give her a trip to Europe where she will study in Paris for four years. She will make annual $3,000 withdrawals at the beginning of each year beginning with a withdrawal when she leaves for France right after graduation. If you can earn 7% on your account, and she can invest her remaining funds in a French bank where she will earn 5%, how much must you deposit in the account today so that all of the money will be withdrawn at the end of the last year in Paris? Ignore foreign exchange rates.  

Answer 1

The present value of total withdrawals that would be made by daughters after 4 year is calculated below:

The amount that should be in account after 4 year of deposit made by father must be equal to above calculated amount.

Interest earn by father in deposit account is 7%.

The below expression can be used to calculate the amount that must be deposit by the father today

Father should deposit $8,521.34 today in account.