Ed Sloan wants to withdraw $20,000 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?
A) $20,000 times the future value of a 5-year, 10% ordinary annuity of 1.
B) $20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1.
C) $20,000 times the present value of a 5-year, 10% ordinary annuity of 1.
D) $20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1.

Question

Quizplus · Accepted Answer

Ed Sloan needs to calculate the present value of an ordinary annuity to determine how much he should invest initially. This calculation will tell him the amount needed today to achieve his goal of withdrawing $20,000 at the end of each year for five years, given a 10% annual interest rate.

Ed Sloan Wants to Withdraw $20,000 (Including Principal) from an Investment