You have a newborn son. You want to plan for his future and there are 2 things that you would like to be able to give him. At the age of 18, you want to buy him a car, which will cost $30,000. At the age of 18, you would like to send him to college, costing $20,000 each year for 4 years. You plan to start on his 1st birthday making annual deposits through his 18th birthday. Assuming a 10% interest rate, how much money will you need to deposit each year to be able to meet these financial goals?
You have a newborn son. You want to plan for his future and there are 2 things that you would like to be able to give him. At the age of 18, you want to buy him a car, which will cost $30,000. At the age of 18, you would like to send him to college, costing $20,000 each year for 4 years. You plan to start on his 1st birthday making annual deposits through his 18th birthday. Assuming a 10% interest rate, how much money will you need to deposit each year to be able to meet these financial goals?
STEP 1
The amount of money that would be required today to support a series of future annuity payments is known as the present value of an annuity.
Money has a time value, therefore an amount received today is worth more than an equal amount at a later time.
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