Following the birth of a child

Question

Following the birth of a child, a parent wants to make an investment P 0 that will grow to $60,000 for the child’s education at age 18. Interest is compounded continuously at 7%. What should the initial investment be? Such an amount is called the present value of $60,000 due 18 years from now. The present value is about....

Answer 1

Kayla,

In general A(t)=A₀*e^k*t where A(t) is the amount at time t, A₀ is the initial amount ( this is what we are looking for) and k in the growth rate (interest) in yr^-1 We want to find A₀ when t=18 years and A(18)=60,000$ and k=.07 so we have 60,000=A₀*e.^.07*18 so A₀=60,000/3.53 = 17,019$.

The parents must put up $17,019 initially in order to have $60,000 in 18 years.

Regards

Jim