Judge Drago has decided to set up an educational fund for his favorite granddaughter, Emma, who will start college in one year. The judge plans to deposit an amount in a savings account that pays 7% annual interest. He wants to deposit an amount that is sufficient to permit Emma to withdraw $21,100 for tuition starting in one year and continuing each year for a total of four years. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)How much should he deposit today to provide Emma with a fund to pay for her college tuition? (Round your answer to nearest whole dollar.)

$7,113

Explanation:

Since Judge Drago wants Emma to start withdrawing $21,100 for tuition starting in one year, the relevant formula to use is the formula for calculating the present value  (PV) of an ordinary annuity which is stated as follows:

PV = P × [{1 - [1 ÷ (1+r)]^n} ÷ r] …………………………………. (1)

Where;

PV = Amount to deposit today =?

P = yearly withdrawal = $21,100

r = interest rate = 7%, or 0.07

n = number of years = 4

Substitute the values into equation (1) to have:

PV = $2,100 × [{1 - [1 ÷ (1 + 0.07)]^4} ÷ 0.07]

     = $2,100 × 3.38721125646392  

PV = $7,113

Therefore, Judge Drago should deposit $7,113 today to provide Emma with a fund to pay for her college tuition.

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