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7 September, 18:12

2. A depositor puts $25,000 in a saving account that pays 5% interest, compounded semiannually. Equal annual withdrawals are to be made from the account, beginning one year from now and continuing forever. What is the maximum annual withdrawal.

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  1. 7 September, 20:15
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    The correct answer is $1265.60.

    Explanation:

    According to the scenario, the given data are as follows:

    Present Value (PV) = $25,000

    Rate of interest = 5%

    Rate of interest (semi annual) (r) = 2.5%

    Time period (semi annual) = 2

    So, First we calculate the effective annual interest rate,

    Effective annual interest rate = (1 + r) ^n = (1.025) ^2 - 1

    =5.0625%

    So, Annual Withdrawal = PV * Effective annual interest rate

    by putting the value, we get

    Annual withdrawal = $25,000 * 5.0625%

    = $1265.60
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Home » Business » 2. A depositor puts $25,000 in a saving account that pays 5% interest, compounded semiannually. Equal annual withdrawals are to be made from the account, beginning one year from now and continuing forever. What is the maximum annual withdrawal.
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