Question

You have inherited $25,000 and wish to purchase an ordinary annuity that will provide you with...

You have inherited $25,000 and wish to purchase an ordinary annuity that will provide you with a steady income over the next 12 years. You have heard that the local savings and loan association is currently paying 6% compound interest on an annual basis. If you were to deposit your funds, what year-end equal-dollar amount would you be able to withdraw annually such that you would have a zero balance after your last withdrawal 12 years from now? [10 pts]

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Answer #1

Information provided:

Present value= $25,000

Time= 12 years

Interest rate= 6%

Ordinary Annuity refers to an annuity that occurs at the end of the period.

The below is entered in a financial calculator to compute the ordinary annuity:

PV= 25,000

N= 12

I/Y= 6

Press the CPT key and PMT to compute the amount of ordinary annuity.

The value obtained is 2,981.93.

Therefore, $2,981.93 is withdrawn annually so that I would have zero balance after 12 years.

In case of any query, kindly comment on the solution.

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