In: Economics
Adam withdraws uniformly from a savings account, at a rate of $ 3 000 for 6 years. Then due to unforeseen circumstances, he needs to increase his annual withdrawal by an additional $ 1 900. He continues to withdraw money at this increased rate for another 5 years until the account is exhausted. With an interest rate of 10%, what was the initial value of the savings account?
As per the question the uniform withdrawal of $3000 made by Adam for 6 year
Annual withdrawal (A) =$3000
Period (N) =6 years
Rate of interest (i) = 10%
Present worth (PW) = A(P/A,i,N) = 3000(P/A,10%,6) = 3000(4.3553) =$13065.9
PW of withdrawn from year 1 to 6 = $13065.9
Due to some problem he increased his annul withdrawal by $1900 for another five year
A1=3000 + 1900 =4900
G=1900
N= 5 years
Rate of interest (i) = 10%
A=A1 + G(A/G,10%,5) = 4900 + 1900(1.8101) = $8339.19
Present worth (PW) of the withdrawal = 8339.19(P/A,10%5)(P/F,10%,6)
Present worth (PW) of the withdrawal = 8339.19(3.7908)(0.5645) = $17845.087
PW of withdrawn from year 7 to 11 = $17845.087
Initial value or PW of the saving account = PW of withdrawn from year 1 to 6 + PW of withdrawn from year 7 to 11
Initial value of the saving account (PW) = $13065.9 + $17845.087 = $30910.98
Initial value of the saving account is $30910.98