Question

You are planning to make 18 monthly withdrawals beginning at the end of the sixth month. You plan to withdraw $101 in the sixth month and increase your withdrawals by $16 over the previous month’s withdrawal. How much should you deposit now in a bank account that pays 12% per year compounded monthly?

Answer 1

Given, sixth month withdrawal, A = $ 101

Every time amount withdrawal increases by , G =$ 16

Interest rate = 12% per year, compounded monthly

Interest per month,i = 1%

The present value of cash flow can be written as follows

P = A(P/F,i%,5)*(P/A,i%,18) + G(P/F,i%,5)*(P/G,i%,18)

P = 101*0.9515*16.398 + 16*0.9515*134.995

P = $ 1,575.872 + 2,055.163

P = $ 3,631.04

Then we must deposit $ 3,631.

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