Ashley is planning to attend college when she graduates from high school 7 years from now. She anticipates that she will need $10,000 at the beginning of each of the four college years to pay for tuition and fees, and have some spending money
Ashley has made an arrangement with her father to do the household chores if her dad deposits $3,500 at the end of each year for the next 7 years in a bank account paying 8 percent interest. Will there be enough money in the account for Ashley to pay for her college expenses? Assume the rate of interest stays at 8 percent during the college years.
At the beginning of the first year of college:
PV = 10,000 + (10,000/0.08 ) × [1-1/(1.08 )3]
= 10,000 + 25,770.96 = $35,770.96
PMT = $3,500, r= 8%, n = 7
FVA = 3,500{[(1.08 )7-1]/0.08} = 3,500(8.923 ) = $31,230
Ashley will need $4,541 (= $35,770.96 -$ 31,230 ) additional money to pay for her college education.
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