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18 September, 00:39

A couple plans to save for their child's college education. What principal must be deposited by the parents when their child is born in order to have $42,000 when the child reaches the age of 18? Assume the money earns 7% interest, compounded quarterly.

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  1. 18 September, 01:07
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    Answer: $12,044

    Explanation:

    Compound interest/Formula

    A=P (1 + r/n) ^ nt

    A = final amount

    P = initial principal balance

    r = interest rate

    n = number of times interest applied per time period

    t = number of time periods elapsed (years)

    Where A=42000, P=?, r=7%, n = 4 times, t=18

    42000 = P (1 + 0.07/4) ^4 (18)

    42000 = P (1 + 0.0175) ^72

    42000 = P (1.0175) ^72

    42000=P (3.4872)

    Divide both sides by 3.4872 to make P the subject of the formula

    P=$12,044
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