In order to help you through college, your parents just deposited $25,000 into a bank account paying 8% interest. Starting tomorrow, you plan to withdraw equal amounts from the account at the
Beginning of each of the next four years. What is the MOST you can withdraw annually?

Question

Quizplus · Accepted Answer

The present value (PV) of the $25,000 is $25,000. The time period (n) is 4 years, and the interest rate per year (i) is 8% or 0.08.
Using the formula for the present value of an ordinary annuity, we can find the annual withdrawals:
PV = A x [(1 - (1 + i)^(-n)) / i]
$25,000 = A x [(1 - (1 + 0.08)^(-4)) / 0.08]
$25,000 = A x 3.31213
A = $25,000 / 3.31213
A = $7,548.02 (rounded to the nearest penny)
Therefore, the most that can be withdrawn annually is $7,548.02, which is answer choice B.

In Order to Help You Through College, Your Parents Just