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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Present Value of an Annuity John Joshua wants to make 5 equal annual withdrawals of $20,000 from a fund that will earn interest at 12% compounded annually.

Required:

How much would John have to invest on January 1, 2019, if he makes the first withdrawal on:

  1. 1. January 1, 2020
  2. 2. January 1, 2019
  3. 3. January 1, 2023

1.

To determine

Determine the amount required to be invested on January 1, 2019, if the first withdrawal is made on January 1, 2020.

Explanation

Annuity: An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.

Cash flow occurs during the first day of each time period is known as an annuity due, whereas cash flow occurs during the last day of each time period is known as an ordinary annuity.

Determine the amount required to be invested on January 1, 2019, if the first withdrawal is made on January 1, 2020.

Here, the cash flow (withdrawals) occurs during the last day of each time period, hence it is an ordinary annuity.

PVO=Cash flow×(pOn,i)PVO=$20,000×

2.

To determine

Determine the amount required to be invested on January 1, 2019, if the first withdrawal is made on January 1, 2019.

3.

To determine

Determine the amount required to be invested on January 1, 2019, if the first withdrawal is made on January 1, 2023.

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