Question

An account pays an annual rate of 8% percent compounded monthly. What lump sum must you deposit into the account now so that in 10 years you can begin to withdraw $4000 each month for the next 20 years, drawing down the account to zero?

Answer 1

  

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Present Value Annuity after 10 years =

where r is the rate of Return for compounding period = 8% / 12 = 0.00666666666

n is the no of compounding period 20 years * 12 = 240

=

= 478217.167096

Present Value today = 478217.167096 / (1+r)^n

r = 0.00666666666

n = 10 years * 12 = 120

= 478217.167096 / (1+0.00666666666)^120

= 215448.05

You need to deposit a lump sum of 215448.05 today