Stacey and Bruce want to begin saving for their baby's college education. They estimate that they will need $200,000 in eighteen years.

If they are able to earn 6% per annum, how much must be deposited at the beginning of each of the next eighteen years to fund the education?

a. $6,471. b. $6,105. c. $11,111. d. $5,924.

Future value (FV) = $200,000

Interest rate (r) = 6% = 0.06

Number of years (n) = 18 years

Annuity per period (A) = ?

FV = A (1 + r) n+1 - (1 + r)

r

$200,000 = A (1 + 0.06) 18+1 - (1 + 0.06)

0.06

$200,000 = A (1.06) 19 - (1.06)

0.06

$200,000 = A (32.7599917)

A = 200,000

32.7599917

A = $6,105

The correct answer is B

Explanation:

The formula to be applied is the formula for future value of annuity due. All the variables were given with the exception of annuity per period. Thus, annuity per period becomes the subject of the formula.