3. TVM Example Suppose you want to ensure that you can finance your daughter’s college education. You expect that the cost will be about $12,000 a year ($1000 a month) for 4 years. Assume she will withdraw $1000 at the end of each month from a savings account. How much would you have to deposit into the account when she enters college if the account pays 6% annual interest compounded monthly?
4. In this particular example: n is 4 years × 12 periods per year = 48 periods. i is 6% per year ÷ 12 periods per year = 0.5% per period. PV is the quantity to be calculated — the present value when the financial transaction begins. PMT is $1000. FV is zero, since by the time your daughter graduates she will not need any more money.
