Question

How much money does one need in an account earning 8% annually today so that he can withdrawal $1500.00 from this account each year for five years with the first withdrawal coming ten years from now?

Answer 1

Annual withdrawal each year starting 10 years from now = $1500

Calculating the Present Value of theses withdrawal at (t=10) using the formula:-

Where, C= Periodic Withdrwals = $1500

r = Periodic Interest rate = 8%

n= no of periods = 5

PV10 = $6,468.19

The Present Value of Withdrawal at(t=10) or 10 yeaers from now is $6,468.19

Now, Calculating PV10 to PV0:-

PV0 = PV10/(1+r)^10

= $6468.19/(1.08)^10

= $2,996.02

So, money needed in account today is $2,996.02

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