Question

Michael received $8000 from his parents to attend college. If he invests the money at 12% per annum compounded monthly, how much can he draw monthly for the next 2 years starting 1 month later?

Answer 1

Given,

Present value = $8000

Interest rate = 12% or 0.12

No. of years = 2 years

Solution :-

Monthly interest rate (r) = 0.12/12 = 0.01

No.of months (n) = 2 years x 12 = 24 months

Monthly withdrawals = (Present value x r) [1 - (1 + r)^-n]

= ($8000 x 0.01) [1 - (1 + 0.01)^-24]

= $80 [1 - (1.01)^-24]

= $80 [1 - 0.7875661274]

= $80 0.2124338726 = $376.59

So, he can withdraw $376.59 monthly.