Search 74,394 tutors
FIND TUTORS
Ask a question
0 0

the amount t a person would need to deposit today to be able to withdraw $6000 each year for 10 years from an account earning 6 percent

Tutors, please sign in to answer this question.

1 Answer

Hi Kelli!
 
Ok this problem involves something called the Annuity Due Payment, and there is a standard formula for solving this type of problem:
 
Pmt=PV * ( r / ( 1-(1+r)-n ) ) * 1/(1+r)
 
where Pmt is the annual payment ($6,000.00 in this case), PV is the present value, or the amount deposited today, r is the interest rate per period (6%), and n is the number of periods (10). So, we have to plug a few things in:
 
$6,000 = PV * ( 0.06 / (1-1.06-10) ) * 1/1.06
 
Multiplying out the right hand side gives us
 
$6,000 = PV * 0.128177319
 
Dividing both sides by 0.128177319 yields
 
PV = $46,810.15
 
To illustrate what happens to this money, I will write a quick table for you:
 
 
n          PV           PV-6,000
1     46,810.15     40,810.15
2     43,258.76     37,258.76
3     39,494.28     33,494.28
4     35,503.94     29,503.94
5     31,274.18     25,274.18
6     26,790.63     20,790.63
7     22,038.07     16,038.07
8     17,000.35     11,000.35
9     11,660.37       5,660.37
10     5,999.99             0.00
 
In the table above, for n = 2 and greater, PV was calculated by adding interest of 1.06X from the remaining balance from the previous period after the withdraw of $6,000.00 was made.