On January 2, 2016, Christopher inherited a trust fund that he could use for college tuition. Christopher hopes to make five equal withdrawals of $40,000 each year for the next five years from the fund that will earn 10% compounded annually. The first withdrawal will be made on January 2, 2017. How much does he need to have invested in the fund on January 2, 2016, to be able to withdraw the needed amounts each year?
A) $151,631
B) $200,000
C) $244,204
D) $268,624

Question

Quizplus · Accepted Answer

To find the present value of the withdrawals, we use the formula for the present value of an annuity: PV = PMT × [(1 - (1 + r)^-n) / r]. Here, PMT = $40,000, r = 0.10, and n = 5. Calculating this gives PV ≈ $151,631.

On January 2, 2016, Christopher Inherited a Trust Fund That