16 Present value 17 The two sets of grandparents for a newbo

1.6 Present value 17. The two sets of grandparents for a newborn baby wish to invest enough money immediately to pay $10,000 per year for four years toward college costs starting at age 18. Grandparents A agree to fund the first two payments, while Grandparents B agree to fund the last two payments. If the effective rate of interest is 6% per annum, find the difference between the contributions of Grandparents A and B.

Solution

PV of the cash flow = FV / (1+rate)^time

Calculating the present value for Grandparents A

Grandpartents A wil be investing $10000 in year 18 and 19.

PV = 10000*(1/(1+6%)^18) + 10000 * (1/(1+6%)^19)

= 3503.44 + 3305.13

= 6808.57

Grandparents b will invest 10000 in 20 years and 21 years

PV = 10000*(1/(1+6%)^20) + 10000 * (1/(1+6%)^21)

= 3118.05+2941.55

= 6059.60

Difference in contribution

= 6808.57 - 6059.60

= 748.97