An amount of $10,000 is deposited into a savings account that pays interest at a rate...

An amount of $10,000 is deposited into a savings account that pays interest at a rate of 7%. If 10 equal annual withdrawals are made from the account starting one year after the money was deposited, how much can be withdrawn so that in the fifth year one would be able to withdraw an additional $1,000 and the account would be depleted after 10 years?

Explain verbally in detail and sketch a timeline to illustrate.

Expert Solution

Present Value = $10,000

Value of $1,000 additional needs to be withdrawn at the end of 5th year, so reducing it,

Value remaining = 10,000 - 1,000/(1.07)⁵

Value remaining = $9,287.01

Calculating annual withdrawal,

Using TVM Calculation,

PMT = [PV = 9,287.01, FV = 0, N = 10, I = 0.07]

PMT = $1,322.26

Annual Withdrawal = $1,322.26

jeff jeffy answered 2 years ago

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