Question

Suppose your rich uncle gave you $50,000, which you plan to use for graduate school. You will make the investment now, you expect to earn an annual return of 6%, and you will make 4 equal annual withdrawals, beginning 1 year from today. Under these conditions, how large would each withdrawal be so there would be no funds remaining in the account after the 4th withdrawal?

a. $15,767.58
b. $14,862.46
c. $14,068.83
d. $14,429.57
e. $15,308.33

Answer 1

To calculate the size of each withdrawal, we use compound interest where each withdrawal derived is $14,862.46. Thus, the option b is the correct answer.

Step-by-step explanation:

To find the size of each withdrawal, we need to calculate the future value of the initial investment using compound interest. We can use the formula:

Future Value = P * (1 + r)^n

where:

• P is the initial investment
• r is the annual interest rate
• n is the number of years

In this case, the initial investment is $50,000, the annual interest rate is 6%, and the number of years is 4.

Future Value = $50,000 * (1 + 0.06)^4 = $59,207.84

Since we are making 4 equal withdrawals, each withdrawal would be:

$59,207.84 / 4 = $14,801.96

Therefore, the correct answer is option b. $14,862.46.