A financial planning service offers a college savings program. The plan calls fo

Question

A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $13,500 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will provide $27,000 per year for four years.

A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $13,500 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will provide $27,000 per year for four years.

Explanation / Answer

Answer:

We need to arrive at the value as on 18th birthday ie the amount earned and the amount invested

Hence the future value of the amount invested annually 13500 will be = 13500 * future value annuity factor 5 years + 1 because starting now hence it will be = 13500*FVIFA 6,r% = 27000/Present value Interest annuity factor 4,r%

13500+ 13500*(1+r)^1 +......+13500*(1+r)^5= 27000/(1+r)^1 + .... +27000/(1+r)^4

Hence rate r = 5% per annum

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