Al Darby wants to withdraw $20100 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 8% compounded annually?

Question

Lucia Valentine

Business

11 May, 04:16

Al Darby wants to withdraw $20100 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 8% compounded annually?

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Answers (1)

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Glenn Valentine · Answer 1

The value of the initial investment was $15749

Explanation:

$20100 times the present value of a 5-year, 8% ordinary annuity of 1.

The present value at the year zero can be found using the discounting formula which is as under:

Present value = Future Value / (1+r) ^n

Here n is 5 years, r is 5% and the future value is $20100.

By putting the values in the formula:

Present Value = $20100 / (1+5%) ^5 years = $15749