Question

You have deposited $8,800 in a special account that has a guaranteed interest rate of 20% per year. If you are willing to completely exhaust the account, what is the maximum amount that you could withdraw at the end of each of the next 7 yn exceliea

Answer 1

Answer:

Maximum amount = $10,108.43  

Explanation:

The maximum amount that can be withdrawn from the account would be the future value of the lump sum of $8,800 invested at 20% p.a.

The future value under compound interest is computed as follows:

FV = P ×(1 +r )^(n)

FV - future value P- principal deposit, rate per period , n- number of period

The future value

PV- 8,800, r- 20%, n- number of years

= 8,800 × (1+0.2)^(7)= $10,108.43  

Future value = $10,108.43  

Answer 2

The maximum amount that you could withdraw yearly for seven years to exhaust the account is $2,441.33.

Data and Calculations:

N (# of periods) = 7 years

I/Y (Interest per year) = 20%

PV (Present Value) of special deposit = $8,800

FV (Future Value) = $0

Results

Annuity Payouts = $-2,441.33

Sum of all periodic withdrawals = $-17,089.31

Total Interest earned = $8,289.31

Thus, the depositor can withdraw $2,441.33 each year so that by end of 7 years, the special account will be zero.

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