Question

2) You were fired from your last job & received a severance of $20,000. You figure you will be out of work for the next 6 months. If you put your severance money in an account that pays 4% interest compounded monthly, how much can you withdraw from the account at the end of every month? Please also provide a cash flow diagram. (4 marks)

Answer 1

To caluculate monthly equal withdrawal with coumpund interest, following formula can be used [A*r*(1+r)^n] / [(1+r)^n-1] Where, A = Principal Amount r = Interest Rate 20000 0.33% (4%/12) n= No. of Periods Equal Amount can be withdrwan monthly a b [A(1+r)^n] [(1+r)^n-1] 20000*.0033*(1+.0033)^6 [(1+.0033)^6-1] 68.01115992 0.020167407 Equal Amount can be withdrwan monthly a/b 68.0111/.02016 Equal Amount can be withdrwan monthly 3372

Cash Flow Diagram Month Opening Balance 20000 16695 13379 10052 6714 3364 Compounded Interest Rate (4%/12) Monthly Interest Amount 0.33% 20067 0.33% 16751 0.33% 13424 0.33% 10086 0.33% 6736 0.33% 3375 Amount to be withdrawn 3372 3372 3372 3372 3372 3375 16695 13379 10052 6714 3364