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.

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