A depositor puts $30,000 in a savings account that pays 4% interest, compounded quarterly. Equal annual withdrawals are to be made from the account, beginning one year from now and continuing forever. What is the maximum annual withdrawal? Please show me every step
A depositor puts $30,000 in a savings account that pays 4% interest, compounded quarterly. Equal annual withdrawals are to be made from the account, beginning one year from now and continuing forever. What is the maximum annual withdrawal? Please show me every step
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 24P
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Question
A depositor puts $30,000 in a savings account that pays 4% interest,
compounded quarterly. Equal annual withdrawals are to be made
from the account, beginning one year from now and continuing
forever. What is the maximum annual withdrawal?
Please show me every step
Expert Solution
Introduction
A perpetuity is a security that pays for an infinite amount of time. In finance, perpetuity is a constant stream of identical cash flows with no end. The formula to calculate the present value of a perpetuity, or security with perpetual cash flows, is as follows:
where:
PV = present value
C = cash flow
r = discount rate
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