Question

You have saved $25,727.00 for a three-year vacation to Germany. You will keep your money invested in an account paying 7.56% APR with monthly compounding while you live in Munich. You will make your withdrawals at the beginning of the month.

How much can you withdraw each month?

What is the balance on the account after the first month? (This is the balance prior to the withdrawal for the second month)

Answer #1

total saving = $25,727

APR = 7.56% componded monthly

Effective annual rate = [(1+ 7.56% / 12) ^ 12] - 1

= 1.0783 - 1

= 7.83%

Effective annual rate is 7.83%.

a.

Monthly Withdrawal amount is calculated in excel and screen shot provided below:

Value of monthly Withdrawal is $798.93.

b.

Interest received in first month = $25,727 × 7.83% / 12

= $167.82.

Withdrawal in first month = $798.93

Balance at end of first month = ($25,727 + $167.82) - $798.93

= $25,894.82 - $798.93

= $25,095.88

Balance at end of first month will be $25,095.88.

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