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Sun Publications reported that in 11 years, it would cost approximately $80,000 for four years at...

Question:

Sun Publications reported that in 11 years, it would cost approximately $80,000 for four years at a public university and $240,000 to send your child to a private university. Bank A quoted 6% interest compounded annually. Bank B quoted 7% compounded annually. How much would you have to deposit in Bank A each year to pay for the public university?

Annuity:

An annuity is a common fixed-income security that investors should include in the portfolio investment if they are seeking a low-risk portfolio. Due to the stable stream of cash inflows, an annuity will promise a lower return compared to other securities such as stocks.

Answer and Explanation: 1

Given information:

  • N = 11
  • I = 7%
  • FV = $80,000
  • Assume that all deposits will be made at the end of each year.
  • After 11 years, the value of all deposits should be $80,000.


Determine the annual deposit in Bank A to fund for the study at a public university:

{eq}FV = \displaystyle Annual\:deposit \times \frac{(1 + I)^N - 1}{I} {/eq}

{eq}$80,000 = \displaystyle Annual\:deposit \times \frac{(1 + 7\%)^{11} - 1}{7\%} {/eq}

{eq}Annual\:deposit = $5,068.55 {/eq}


Learn more about this topic:

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What is Annuity? - Definition & Formula

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Chapter 2 / Lesson 7
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An annuity is a fixed amount of income paid at regular intervals, such as monthly or quarterly. Learn the definition and formula for annuity, review examples of annuities, and understand how to determine the value of annuities.


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