Question

With a present value of $125,000, what is the size of the withdrawals that can be made at the end of each quarter for the next 10 years if money is worth 7.7%, compounded quarterly? (Round your answer to the nearest cent.)

Answer 1

The amount is computed as shown below:

Present value = Quarterly withdrawal x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 7.7% / 4 (Since the interest is compounded quarterly, hence divided by 4)

= 1.925%

n is computed as follows:

= 10 x 4 (Since the interest is compounded quarterly, hence multiplied by 4)

= 40

So, the amount will be as follows:

$ 125,000 = quarterly withdrawal x [ (1 - 1 / (1 + 0.01925)⁴⁰ ) / 0.01925]

$ 125,000 = quarterly withdrawal x 27.7187746

quarterly withdrawal = $ 125,000 / 27.7187746

quarterly withdrawal = $ 4,509.58 Approximately

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