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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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Refer to the present value table information on the previous page. What amount should Brett have in his bank account today, before withdrawal, if he needs $2,000 each year for 4 years, with the first withdrawal to be made today and each subsequent withdrawal at 1-year intervals? (Brett is to have exactly a zero balance in his bank account after the fourth withdrawal.)

  1. a. $2,000 + ($2,000 × 0.926) + ($2,000 × 0. 857) + ($2,000 × 0.794)
  2. b. $ 2 , 000 0.735 × 4
  3. c. ($2,000 × 0.926) + ($2,000 × 0.857) + ($2,000 × 0.794) + ($2,000 × 0.735)
  4. d. $ 2 , 000 0.926 × 4

To determine

Determine the amount that Person B should have in his bank account.

Explanation

Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.

Person B wants to withdraw $2,000 each year for 4 years consecutively, first withdraw starts from today. This is an annuity cash flow. In the absence of present value of annuity table, present value of an annuity withdrawal can be calculated using the present value of $1 table as follows:

Present valueof an annuity} = [C of Year 1 + (C of year 2×(Pn=1,i=8%))+(C of year 3×(Pn=2,i=8%))+(C of year 4×

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