Question

You have $25,000 in an account earning an interest rate of 6%. What are the equal beginning-of-month withdrawals you can make from this account such that it is completely depleted with the last withdrawal at the beginning of the last month in 15 years? Round to the nearest cent. ​[Hint: The amount in the account today is the PV of an annuity due where the withdrawals are the annuity cash flows. There will be a total of 15 x 12 withdrawals.]

Answer 1

Information provided:

Present value= $25,000

Time= 15 years*12 = 180 months

Monthly interest rate= 6%/12 = 0.50%

The question is concerning finding the future value of an annuity due. Annuity due refers to annuity that occurs at the beginning of a period.

This is solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode.  Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^ndBGN 2^ndSET on the Texas BA II Plus calculator.

The monthly withdrawal is calculated by entering the below in a financial calculator:

PV= -25,000

N= 180

I/Y= 0.50

Press the CPT key and PMT to compute the amount of monthly withdrawal.

The value obtained is 209.91.

Therefore, the amount of monthly withdrawal is $209.91.

In case of any query, kindly comment on the solution.