grandmother just died and left you $100,000 in a trust fund that pays 6.5% interest.You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately.How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?
A)$24,736
B)$26,038
C)$27,409
D)$28,779
E)$30,218

Question

Quizplus · Accepted Answer

Using the present value of an annuity formula with equal payments, we can calculate the amount that could be withdrawn each year:
PV = PMT x [(1- (1+i)^-n) / i]
Where PV is the present value ($100,000), PMT is the equal payment to be withdrawn each year, i is the interest rate (6.5% or 0.065), and n is the number of years (4).

Plugging in the values, we get:
100,000 = PMT x [(1- (1+0.065)^-4) / 0.065]
100,000 = PMT x 3.4651
PMT = 28,779.15

Therefore, the amount that could be withdrawn each year and still have zero in the account is $27,409.

Grandmother Just Died and Left You $100,000 in a Trust