In: Finance
ou have an account that pays 3% annual interest compounded monthly. You make an initial deposit, and then withdraw $170 at the end of each month for 6 years. At that time you make a second deposit of $9000, and then withdraw $250 at the end of each month for the following 8 years, ending with a zero balance. What is your initial deposit?
First, we calculate the amount in account at the end of 6 years (after depositing $9,000).
Amount in account at the end of 6 years (after depositing $9,000) is calculated using PV function in Excel :
rate = 3%/12 (converting annual rate into monthly rate)
nper = 8*12 (8 years of withdrawals with 12 withdrawals each year)
pmt = -250 (monthly withdrawal. This is entered with a negative sign because it is a cash outflow)
PV is calculated to be $21,313.65
Amount in account before depositing $9,000 = $21,313.65 - $9,000 = $12,313.65
Initial deposit is calculated using PV function in Excel :
rate = 3%/12 (converting annual rate into monthly rate)
nper = 6*12 (6 years of withdrawals with 12 withdrawals each year)
pmt = -170 (monthly withdrawal)
fv = -12313.65 (amount remaining in account at end of 6 years)
type = 0 (each withdrawal is at the end of the month)
PV is calculated to be $21,476.40
Initial deposit is $21,476.40