Stacey has $5,000,000 on deposit in a fund that earns 9% interest compounded annually. How much can Stacey withdraw annually from the fund in ten equal annual withdrawals to completely deplete the fund after the tenth draw, assuming the first withdrawal occurs today?
A) $714,771
B) $779,100
C) $861,298
D) $922,908

Question

Quizplus · Accepted Answer

The correct answer can be found using the formula for the present value of an annuity due, since the first withdrawal occurs today. The formula is $PV = PMT \times \left(\frac{1 - (1 + r)^{-n}}{r}\right) \times (1+r)$, where PV is the present value ($5,000,000), PMT is the annual payment, r is the annual interest rate (9% or 0.09), and n is the number of periods (10 years). Solving for PMT gives us the annual withdrawal amount, which matches option A, $714,771, when calculated correctly.

Stacey Has $5,000,000 on Deposit in a Fund That Earns