How much should a father invest at the time his daughter is born in order to provide her with $50,000 at age 21? Assume that the interest is 8% compounded semiannually

Question

How much should the father invest?

Answer 1

The father wants to have $50,000 in 21 years to provide his daughter with sufficient funds for her studies. So, Future value of the investment is $50,000. We are provided with 8% interest rate compounded semiannually meaning interest rate compounded twice a year, so it is 4% per half a year (8%/2). The number of periods that we have is 21 annual periods*2 as we have semiannual interest rate = 42 in total. To sum up,

FV=$50,000

rate=4%

nper=42

Pmt=0 ( as the father only invests once in the beginnings with no further additions)

PV--->?

Solving in Excel or calculator we got the answer of $9,628.75. Father needs to invest $9,628.75 now in order to receive $50,000 in 21 years.