You set up a college fund in which you pay $4500 each year at the beginning of the year

Finance Dec 19, 2020

You set up a college fund in which you pay $4500 each year at the beginning of the year. How much money (in $) will you have accumulated in the fund after 21 years, if your fund earns 11% compounded annually?

Expert Solution

We can use the Future value (FV) of annuity due formula because we assume that the deposits made at the beginning of each year

FV = PMT*(1+i) *{(1+i) ^n−1} / i

Where,

FV of the deposits after 21 years =?

PMT = annual deposit = $4500

n = N = number of payments = 21

i = I/Y = interest rate per year = 11%

Therefore,

FV = $4500*(1+11%) *{(1+11%) ^21−1} / 11%

Or FV = $360,964.39

Future value of deposits will be $360,964.39

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