Question

You currently have 10000 in a saving account that earn 6% per year. How much can you withdraw at the end of each of the next three years from this account and have a zero balance after third withdraw?

Answer 1

The problem is related to ordinary annuity. We need to make a equation as below to find out withdrawal amount at the end of each year.

Present Value of Amount in Saving Account = Withdrawal amount at the end of each year x Present Value Interest factor for ordinary annuity at 6% for 3 years

10,000 = Withdrawal amount at the end of each year x Present Value Interest factor for ordinary annuity at 6% for 3 years i.e. 2.67301

Withdrawal amount at the end of each year = 10,000 / 2.67301 = $3,741.10

Present Value Interest factor for ordinary annuity at 6% for 3 years = ((1 - (1/1.06)3 ) / 0.06

= 2.67301