Chapter 5, #5 Assume the total cost of a college education will be $300,000 when

Question

Chapter 5, #5

Assume the total cost of a college education will be $300,000 when your child enters college in 18 years. You presently have $71,000 to invest

What annual rate of interest must you earn on your investment to cover the cost of your child’s college education? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What annual rate of interest must you earn on your investment to cover the cost of your child’s college education? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

FV = PV(1+R)N

300000 = 71000(1+R)18

4.225 = (1+R)18

To finish solving the equation, we search only the "n = 18" row of the FV of 1 Table for the FV factor that is closest to 4.225. , and it is located in the column between with the heading i = 8 and 9 %

at 8% factor = 3.9960

at 9% factor = 4.7171

required factor = 4.225

there fore Anual rate of interest = (4.7171-3.9960)/9%-8%)*(4.7171-4.225)

= 8.35%

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