Question

A man wants to make a $20,000 investment into a bank account towards college education for his grandchild. Assume this will be ready in 18 years. The man plans to pay 5% interest compounded monthly. Calculate the future value of this investment. Will this investment cover the average cost of college education today? What about the future?

Answer 1

http://en.wikipedia.org/wiki/Compound_interest

Are you sure that this:
The man plans to pay 5% interest compounded monthly

Isn't supposed to say:
The plan pays 5% interest compounded monthly

Answer 2

must be a typo

Answer 3

\[A=P(1+\frac{r}{n})^{nt}\]

Where,

A = final amount
P = principal amount (initial investment)
r = annual nominal interest rate (as a decimal) (it should not be in percentage)

n = number of times the interest is compounded per year
t = number of years

P=20000
r=0.05
n=12
t=18

http://www.wolframalpha.com/input/?i=20000*%281%2B0.05%2F12%29^%2812*18%29

A= $49100.16

Answer 4

thanks! Any idea on how to answer the remaining part?

Answer 5

for the second part, you need a value for the average amount people spend on uni degrees. I think it's around $50-200k

if you're going to a cheap uni, then yeah it will pay for it. It won't help much in the future due to inflation, though

Answer 6

OK so should this average amount be for the four year college period or just an academic year? I'm assuming the investment is to cover the entire period of college education.

Answer 7

the entire period, as the original statement says that the man wants his offspring to have a 'college education'.

Answer 8

ok thanks!