Judge Drago has decided to set up an educational fund for his favorite granddaughter, Emma, who will start college in one year. The judge plans to deposit an amount in a savings account that pays 7% annual interest. He wants to deposit an amount that is sufficient to permit Emma to withdraw $21,100 for tuition starting in one year and continuing each year for a total of four years. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)How much should he deposit today to provide Emma with a fund to pay for her college tuition? (Round your answer to nearest whole dollar.)

$7,113

Explanation:

Since Judge Drago wants Emma to start withdrawing $21,100 for tuition starting in one year, the relevant formula to use is the formula for calculating the present value  (PV) of an ordinary annuity which is stated as follows:

PV = P × [{1 - [1 ÷ (1+r)]^n} ÷ r] …………………………………. (1)

Where;

PV = Amount to deposit today =?

P = yearly withdrawal = $21,100

r = interest rate = 7%, or 0.07

n = number of years = 4

Substitute the values into equation (1) to have:

PV = $2,100 × [{1 - [1 ÷ (1 + 0.07)]^4} ÷ 0.07]

     = $2,100 × 3.38721125646392  

PV = $7,113

Therefore, Judge Drago should deposit $7,113 today to provide Emma with a fund to pay for her college tuition.

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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