On January 2, 2010, Claudia Company inherited a trust fund that she could use for college tuition.Claudia hopes to make five equal withdrawals of $40, 000 from the fund that will earn 10% compounded annually.The first withdrawal will be made on January 2, 2011.How much does she need to have invested in the fund on January 2, 2010, to be able to withdraw the needed amounts each year?
A)$151, 631
B)$200, 000
C)$244, 204
D)$268, 624

Question

Quizplus · Accepted Answer

The present value of an annuity formula is used to calculate the amount needed. The formula is: PV = PMT × [(1 - (1 + r)^-n) / r], where PMT is the annual withdrawal ($40,000), r is the interest rate (10% or 0.10), and n is the number of periods (5 years). Plugging in the values gives PV = $40,000 × [(1 - (1 + 0.10)^-5) / 0.10] = $151,631.

On January 2, 2010, Claudia Company Inherited a Trust Fund