Question

Harry has just inherited $300,000. Harry has decided to quit his job and go to school full time for the next five years by living off this inheritance. Harry will invest the $300,000 in a money market account that has an 8% interest rate. If Harry's goal is to use up the entire inheritance, approximately what amount can he withdraw from the money market account each year for the next five years? Assume that his first withdrawal will be one year from the day that he sets up the account.

Answer 1

Answer:

$ 75131

Explanation:

Given:

Amount inherited = $ 300000

Present amount of annuity = $ 300000

Interest rate, i = 8% = 0.08

number of years, n = 5

Now,

the formula for the present amount of annuity is given as:

Present amount of annuity = $P[\frac{1-(1+i)^{-n}}{i}]$

where,

P is the periodic payment

n is the number of years

now, on substituting the values, we get

$ 300000 = $P[\frac{1-(1+0.08)^{-5}}{0.08}]$

or

$ 300000 = P × 3.993

or

P = $ 75131.48 ≈ $ 75131

hence, the amount he can withdraw is $ 75131