Joe and Bob both want to create a college fund for their children who each just turned 4 years old today, and will start college right after their 18th birthday. They choose different approaches.
approach a) Joe decides to set aside semi-annual payments of $7,974 into a fund guaranteed to earn 10% annually with semi-annual compounding, starting 6 months from today and continuing until he makes the last payment when his child turns 18 years old. Draw a cash flow diagram, set up the interest factor equation that represents the cash flow, and solve for the future worth of the college fund.
Approach B) Bob decides to set aside $60,000 today in an investment portfolio guaranteed to earn 5% annually and which he does not touch again until his child turns 18 years old. Draw a cash flow diagram, set up the interest factor equation that represents the cash flow, and solve for the future worth of the college fund.
Who has the larger college fund when their child turns 18?