You are going to withdraw $1,000 at the end of each year for the next three years from an account that pays interest at a rate of 8% compounded annually. The account balance will reduce to zero
When the last withdrawal is made. How much interest will you earn on the account over the three
Year life?

Question

Quizplus · Accepted Answer

To solve this problem, we need to use the formula for the future value of an annuity:

FV = PMT * ((1 + r)^n - 1) / r

Where FV is the future value, PMT is the payment made at the end of each period, r is the interest rate, and n is the number of periods.

In this case, the PMT is $1,000, the interest rate is 8%, and n is 3.

Using these values, we can calculate the future value of the annuity:

FV = $1,000 * ((1 + 0.08)^3 - 1) / 0.08
FV = $3,246.87

This means that the account will earn a total of $3,246.87 in interest over the three-year life.

However, we need to subtract the total withdrawals of $3,000 to find the net interest earned:

Net interest = $3,246.87 - $3,000
Net interest = $246.87

Therefore, the correct answer is C) $422.90.

You Are Going to Withdraw $1,000 at the End of Each