Question

A sum of $25,000 is deposited into a savings account, which pays 8% interest
compounded semiannually. Equal annual withdrawals are to be made from the account,
beginning 1 year from now and continuing forever. The maximum amount that can be
withdrawn at the end of each year is approximately equal to ____________.
A) $2,250
B) $2,000
C) $2,300
D) $2,040

Answer 1

Solution:-

First we need to Calculate Effective Half year Rate-

Effective Half Year Rate =

Effective Half Year Rate =

Effective Half Year Rate = 8.16%

To Calculate maximum amount that can be withdrawn at the end of each year is approximately equal to-

Maximum Amount = $25,000 * 0.816

Maximum Amount = $2,040.

Maximum amount that can be withdrawn at the end of each year is approximately equal to $2,040.

The Correct Answer is point D i.e. $2,040.

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