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Example 9 from Algebra and Trigonometry, 6.1 Exponential Functions
A 529 Plan is a college-savings plan that allows relatives to invest money to pay for a child’s future college tuition; the account grows tax-free. Lily wants to set up a 529 account for her new granddaughter and wants the account to grow to $40,000 over 18 years. She believes the account will earn 6% compounded semi-annually (twice a year). To the nearest dollar, how much will Lily need to invest in the account now?
Work it out on paper first. Then open the solution one step at a time, and stop as soon as you can finish on your own.
The nominal interest rate is 6%, so Interest is compounded twice a year, so
We want to find the initial investment, needed so that the value of the account will be worth $40,000 in years. Substitute the given values into the compound interest formula, and solve for
Lily will need to invest $13,801 to have $40,000 in 18 years.
The book's Try It right after this example: same idea, new numbers. Only the answer is given.
Refer to Example 9. To the nearest dollar, how much would Lily need to invest if the account is compounded quarterly?
How did it go?