Ali Shah sets aside 2,000 each year for 5 years. He then withdraws the funds on an equal annual basis for the next 4 years. If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use the following two tables in this order:
A) present value of an annuity of $1; future value of an annuity of $1
B) future value of an annuity of $1; present value of an annuity of $1
C) future value of an annuity of $1; present value of a $1
D) future value of an annuity of $1; future value of a $1

Question

Quizplus · Accepted Answer

To find out the amount of the annuity to be withdrawn each year, Ali needs to determine the future value of his savings over the 5-year period, which will be the present value of an annuity to be withdrawn over the 4-year period. Therefore, he needs to use the present value of an annuity of $1 table first to determine the future value of his savings, and then use the future value of an annuity of $1 table to determine the amount of the annuity to be withdrawn each year. Hence, choice B is the best option.

Ali Shah Sets Aside 2,000 Each Year for 5 Years