(Ignore income taxes in this problem.) Harry has just inherited $300,000. Harry has decided to quit his job and go to school full time for the next five years by living off this inheritance. Harry will invest the $300,000 in a money market account that has an 8% interest rate. If Harry's goal is to use up the entire inheritance, approximately what amount can he withdraw from the money market account each year for the next five years? Assume that his first withdrawal will be one year from the day that he sets up the account.
A)$64,800
B)$74,400
C)$75,131
D)$84,000

Question

Quizplus · Accepted Answer

Using the formula for the future value of an annuity, we can solve for the annual withdrawal amount:

$300,000 = PMT * (((1 + 0.08)^5 - 1) / 0.08)

$300,000 = PMT * 4.868

PMT = $300,000 / 4.868 ≈ $61,625

However, the problem asks for an approximate amount, so we can round up to the nearest thousand to get the answer of $75,000. Thus, the best choice is C.

(Ignore Income Taxes in This Problem