What is the investment amount needed? Amy Monroe wants to create a fund today th
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Question
What is the investment amount needed?
Amy Monroe wants to create a fund today that will enable her to withdraw $26,770 per year for 8 years, with the first withdrawal to take place 5 years from today. If the fund earns 10% interest, how much must Amy invest today? (Round the answer to zero decimal places, e.g. 120,250. Hint: Use tables in text.)
Investment amount $ What is the investment amount needed? Amy Monroe wants to create a fund today that will enable her to withdraw $26,770 per year for 8 years, with the first withdrawal to take place 5 years from today. If the fund earns 10% interest, how much must Amy invest today? (Round the answer to zero decimal places, e.g. 120,250. Hint: Use tables in text.)Explanation / Answer
It should be 123,893.74. You can work it as a deferred annuity or annuity due. If you do it as a deferred annuity, find the PV at time 3 since the first payment will be at the end of year 3 (or day 1 of year 4 if you do an annuity due). So your FV is 0 (funds run out), years are 8 and interest 10%, pmt = -30,910. This gives you a PV of 164,902 at the beginning of year 3. Therefore, you discount back 3 years 164,902 / 1.1 /1.1 /1.1 or 164,902 / (1.1^3)
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