Question

17. (Ignore income taxes in this problem.) If you wanted to withdraw $12,000 from a bank account at the end of each of the next 20 years, approximately how much would you have to invest in the account today assuming a 6% interest rate?

a. $20,924
b. $38,462
c. $74,880
d. $137,604

Answer 1

d. $137,604

Explanation:

The amortization formula is good for this. It tells you the principal P that must be invested to support payments of A each year for t years when the interest rate is r:

P = A(1 -(1 +r)^-t)/r

P = $12,000(1 -1.06^-20)/0.06 ≈ $137,639.05

The closest answer choice is $137,604.