Asked by Albin Mathew on Apr 28, 2024
Verified
You are going to withdraw $1,000 at the end of each year for the next three years from an account that pays interest at a rate of 8% compounded annually. How much must there be in the account today in order for the account to reduce to a balance of zero after the last withdrawal?
A) $793.83
B) $2,577.10
C) $2,602.29
D) $2,713.75
E) $2,775.67
Compounded Annually
The process of calculating interest on both the initial principal and the accumulated interest from previous periods on a yearly basis.
Withdraw
The act of removing funds from an account, investment, or deposit.
- Understand the concept of present value and how it is calculated.
- Apply the concept of the time value of money in analyzing financial decisions.
Verified Answer
AT
Angel ToussaintMay 01, 2024
Final Answer :
B
Explanation :
The correct answer is found by calculating the present value of an annuity. The formula for the present value of an annuity is PV = PMT * [(1 - (1 + r)^-n) / r], where PMT is the annual payment ($1,000), r is the annual interest rate (0.08), and n is the number of periods (3 years). Plugging in the values, we get PV = $1,000 * [(1 - (1 + 0.08)^-3) / 0.08] = $2,577.10.
Learning Objectives
- Understand the concept of present value and how it is calculated.
- Apply the concept of the time value of money in analyzing financial decisions.