You have sold your home and would like to travel the European country side. While you are out of the country, you would like the profit that you made on the sale of your home to gain interest while you are away in Europe. You made a profit of 25 dollars comma 000 on the sale of your home, and you invest this amount into an account paying 7 point 8 percent interest compounded annually. If you are to withdraw from the account over a 5 year period, such that by the end of the five year period there is zero dollars in the account, how much annually will you be able to withdraw from the account?
Answer
A
6 dollars comma 228 point 4 4
B
5 dollars comma 821 point 2 2
C
5 dollars comma 959 point 0 2
D
6 dollars comma 012 point 1 0
Explanation
Use the present value formula for equal annual withdrawals at the end of each year: 25,000 = W[1 − (1.078)⁻⁵] ÷ 0.078. Solving gives W = 25,000(0.078) ÷ [1 − (1.078)⁻⁵] ≈ $6,228.44. Therefore, you can withdraw about $6,228.44 annually, choice A.
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