Assume the total cost of a college education will be $395,000 when your child enters college in 18 years. You presently have $65,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college education?

8.87%

Explanation:

Calculation for the annual rate of interest you must earn on your investment to cover the cost of your child’s college education

Using this formula

FV = PV(1 + r)t

Based on the information we were told to calculate for annual rate of return, this means we would be Solving for r

r = (FV / PV)1 / t– 1

Where,

FV =$300,000

PV=$65,000

=1 / t =1/18 years

Let plug in the formula

r = ($300,000 / $65,000)1/18– 1

r=(4.6153846)^0.055555 -1

r=1.08867-1

r= 0.0887 *100

r=8.87%

Therefore the annual rate of interest you must earn on your investment to cover the cost of your child’s college education will be 8.87%

a.

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