You will deposit $2,000 today. It will grow for 10 years at 10% interest compoun

Question

You will deposit $2,000 today. It will grow for 10 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 8 years. The annual interest rate is 8%. Your annual withdrawal will be: Use Appendix A http://lectures.mhhe.com/connect/0073530727/Images/Appendix_A.JPG  and Appendix D. http://lectures.mhhe.com/connect/0073530727/Images/Appendix_D.JPG (Round "PV Factor" and "FV Factor" to 3 decimal places.)

$499

$923

$2,178

$4,170

You will deposit $2,000 today. It will grow for 10 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 8 years. The annual interest rate is 8%. Your annual withdrawal will be: Use Appendix A http://lectures.mhhe.com/connect/0073530727/Images/Appendix_A.JPG  and Appendix D. http://lectures.mhhe.com/connect/0073530727/Images/Appendix_D.JPG (Round "PV Factor" and "FV Factor" to 3 decimal places.)

Explanation / Answer

$923

Working:

Step-1:Future Value of Deposits Future Value = P*(1+i)^n P = $    2,000 = 2000*((1+0.05)^20) i =           0.10 /2 =           0.05 = $    5,307 n = 10 *2 = 20 Step-2:Annual Withdrawl annual Withdrawl = Current Amount/cumulative discount factor = $    5,307 / $    5.747 = $ 923 Cumulative discount factor = (1-(1+i)^-n)/i Where, = (1-(1+0.08)^-8)/0.08 i =           0.08 =         5.747 n = 8

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