Dr. Amara has twins who would be going to college in the next 10 years. She hopes to save enough in order to be able to pay for her kids' college expenses. It is estimated that she would need $1 million dollars to cover all the expenses for both her children. She is willing to save $20,000 every six months for the next 10 years. The estimated rate of return is 7 percent annually that she would be earning in semi-annual compounding basis. Will Dr. Amara have enough to pay for her twin's college expenses? How much would she have saved in 10 years with the interest?

Question

Ramon Gay

Business

16 October, 14:22

Dr. Amara has twins who would be going to college in the next 10 years. She hopes to save enough in order to be able to pay for her kids' college expenses. It is estimated that she would need $1 million dollars to cover all the expenses for both her children. She is willing to save $20,000 every six months for the next 10 years. The estimated rate of return is 7 percent annually that she would be earning in semi-annual compounding basis. Will Dr. Amara have enough to pay for her twin's college expenses? How much would she have saved in 10 years with the interest?

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Answers (1)

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Abraham Scott · Answer 1

Final Value = $565,593.64

Explanation:

Giving the following information:

It is estimated that she would need $1 million to cover all the expenses for both her children. She is willing to save $20,000 every six months for the next 10 years. The estimated rate of return is 7 percent annually that she would be earning on a semi-annual compounding basis.

Effective rate=0.07/2 = 0.035

We need to use the following formula:

FV = {A*[ (1+i) ^n-1]}/i

A = annual deposit

FV = {20000*[ (1.035^20) - 1]}/0.035 = $565,593.64