Respuesta :
Following are a few questions and answers in a summarized manner.
- Is the $4,000 saved annually enough to cover the envisioned college costs?
No, as the maximum withdrawal allowed annually (for 4 years) at an interest rate of 8% is $12,846.23. Every year, her parents will be short $7,153.77.
- Linda's 529 plan underfunded?
Yes, she will have $42,548 in her account when she reaches 18; but, this is insufficient to pay for her college expenditures.
- How much should Lynda put aside each year in her 529 plan to fully cover her tuition and fees?
$6,227.51
- When Lynda is 18 years old, what will the PV of her college expenses be?
The parents of Lynda must have $66,242 in her 529 accounts if they want to pay for her college expenditures.
When Lynda turns 18, her 529 accounts will be funded with the following amount:
Future value equals annual payment times annuity factor (FV annuity factor, 8%, 8 periods)
= $4,000 times 10.637
= $42,548 Her parents will withdraw this amount in 4 installments:
Maximum yearly withdrawal: $42,548 / 3.3121
= $12,846.23
Present value: Annual Withdrawal x PV Annuity Factor (8%, 4 Periods)
20,000 times 3.3121, or $66,242, is the required balance.
payment per year: $66,242 / 10.637 = $6,227.51
What is Present Value?
A future sum of money or stream of cash flows' present value (PV), assuming a given rate of return, is their current value. The discount rate determines the current value of future cash flows; the higher the discount rate, the lower the present value of the future cash flows. The key to correctly valuing future cash flows, whether they be earnings or debt obligations, is determining the appropriate discount rate.
According to the concept of present value, a sum of money is worth more right now than it will be in the future. Or, to put it another way, money received in the future is less valuable than money received in the present in the same amount.
A $1,000 gift today is worth more than a $1,000 gift in five years. Why? The $1,000 can be invested today with the expectation of earning a return over the following five years. Any interest rate that an investment might earn is taken into account by present value.
Thus, $6,227.51 is the correct answer.
For more information on Present Value, refer to the given link:
https://brainly.com/question/17322936
#SPJ4
Complete Question:
Lynda Jones College Plan On her 10th birthday Linda Jone's parents decide to deposit $4,000 in a 529 account for their daughter to go to college. They intend to put an additional $4,000 in the account each year on her 11th, 12th, ..., and 17yh birthdays. Assume all account balances will earn 8% per year. On Lynda's 18th, 19th, 20th, and 21st birthdays, her parents will withdraw $20,000 to pay for Linda's college education. Questions: Is the $4,000 savings per year sufficient to cover the anticipated college expenses? Is Linda's 529 account underfunded? What should be the annual deposit in Lynda's 529 accounts to cover entirely her tuition and fees? What will be the PV of Lynda's college tuition on her 18th birthday? Summarize the results of your analysis and provide your recommendation in this quiz. Create a spreadsheet and submit it to your DropBox.
