Terry Lampron wishes to make 8 annual withdrawals of $3,000 each beginning on May 1,2011.Assuming a 4% interest rate,on May 1,2010,Lampron must deposit an amount of money equal to:
A)$20,198.23
B)$27,642.60
C)$26,192.10
D)$ 9,936.30

Question

Quizplus · Accepted Answer

The correct answer is found by calculating the present value of an annuity, which is the sum needed to be deposited today to achieve those future withdrawals under the given interest rate. The formula for the present value of an annuity is PVA = PMT × [(1 - (1 + r)^-n) / r], where PMT is the annual payment ($3,000), r is the annual interest rate (4% or 0.04), and n is the number of payments (8). Plugging these values into the formula gives the present value, which matches closest to option A.

Terry Lampron Wishes to Make 8 Annual Withdrawals of $3,000