Annuity - BG vs END

Example: it will cost $10,000 a year for 3 years when an 8-year old child is ready for college. How much should be invested today if the child will make the first of 3 annual withdrawals 10-years from today? The expected rate of return is 10%.

Why wouldn’t you use BG or an annuity due here given it states “from today”?


draw a time line for all of these

0 1 2 3 4 5 6 7 8 9 10

at 10 you need 10000, 10000, 10000

how much do you need

PMT=10000, N=3, I/Y=10, CPT PV --> -24868.52

This PV is at year 9 (one year before 10)

Now you are investing some amount of money today (T=0) to get 24868.51 in 9 years

FV=-24868.51 N=9 I/Y=10 PV=?

$10546.68 Ans

Got it - can also use annuity due with N=10 for the 2nd step and yields same result as you have.