It is estimated that the cost for the first year of college at Massive University,the state school with the best operations management program,will be $20,000 by the time your son is ready to matriculate.If prevailing interest rates will average 5 percent,what amount should you invest now to pay his tuition eight years from now?
A) Less than $13,000
B) Between $13,000 and $14,000
C) Between $14,000 and $15,000
D) More than $15,000

Question

Quizplus · Accepted Answer

To find the present value of $20,000 needed in 8 years at a 5% interest rate, use the formula: PV = FV / (1 + r)^n. Plugging in the values: PV = $20,000 / (1.05)^8 ≈ $13,493. Therefore, the amount to invest now is between $13,000 and $14,000.

It Is Estimated That the Cost for the First Year