The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. Mackie's individual retirement account (IRA) currently has a balance of $100,000 and is earning 6%.Beginning one year from today, what equal annual amounts can be withdrawn from the IRA for 10 years so that the balance after the tenth withdrawal is zero?
A) $10,000
B) $12,950
C) $13,587
D) $14,237

Question

Quizplus · Accepted Answer

This problem can be solved by using the present value of an annuity formula, which calculates the equal annual payments required to deplete a specified account balance over a particular time period assuming a given interest rate.

Using the present value of an annuity formula from Table 9-4 with the following inputs:

PMT = X (the equal annual withdrawals we are trying to solve for)
n = 10 (the number of annual withdrawals)
i = 6% (the annual interest rate)
FV = 0 (the desired ending balance after the final withdrawal)

We get:

$100,000 = X * (1 - 1/(1+0.06)^10)/0.06

Solving for X, we get:

X = $13,587

Therefore, the equal annual payments that can be withdrawn from the IRA for 10 years so that the balance after the tenth withdrawal is zero is $13,587.

The Solution to This Problem Requires Time Value of Money