Aunt Darla has agreed to deposit a lump sum into an account that pays 12% intere

Question

Aunt Darla has agreed to deposit a lump sum into an account that pays 12% interest compounded annually in order to pay for her niece's college education. The niece estimated that she will need to withdraw $40,000 at the beginning of each year for four years to pay for room, board, tuition, and books. Aunt Darla will deposit the lump sum on August 1, 2014, and the niece will make the first withdrawal on August 1, 2020.

         Required:                                                                                                                          

         Determine the amount that Aunt Darla must deposit. Clearly label all work.

Explanation / Answer

Present value of money required on August 1, 2014 = 40000/1.12^6 + 40000/1.12^7 + 40000/1.12^8 + 40000/1.12^9

=$68,938.94

amount that Aunt Darla must deposit = $68,938.94

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