Answer to Question #195959 in Management for Muhammad shahzaib

Question

Joe Hernandez has inherited $25,000 and wishes to purchase an annuity that will provide him with a steady income over the next 12 years. He has heard that the local savings and loan association is currently paying 6 percent compound interest on an annual basis. If he were to deposit his funds, what year-end equal-dollar amount (to the nearest dollar) would he be able to withdraw annually such that he would have a zero balance after his last withdrawal 12 years from now?

Answer 1

No. of years = 12

Interest Rate = 6%p.a

Present Value (PV) = $25,000

Installments (P) =?

P.V. annuity formula is PV=P [1-(1+r)-n/r]

Therefore, 25,000=P[1-(1+0.06)-12/0.06]

P=2,981.93, which is 2,982 to the nearest dollar.

Therefore, Joe will be withdrawing 2,982 annually for 12 years.