Calculate how much you would need to invest now in order to fund a year of college twenty years from now, assuming a year of college costs $26,000 now and is inflating at 6%, and your investment will earn 10%. Assume continuous compounding.
A) $11,683
B) $3519
C) $7831
D) $57,864

Question

Quizplus · Accepted Answer

Using the continuous compounding formula:

FV = PV * e^(rt)

Where:

FV = future value (amount needed in 20 years) 
PV = present value (amount to invest today) 
r = annual interest rate (10%) 
t = time in years (20)

First, we need to calculate the future tuition cost in 20 years:

FV = $26,000 * (1 + 0.06)^20 = $93,219.01

Then, we can solve for the present value (amount to invest today):

$93,219.01 = PV * e^(0.10 * 20)

PV = $11,683.38

Therefore, the best choice is A, $11,683.

Calculate How Much You Would Need to Invest Now in Order