How much do you have to deposit today in order to allow 5 annual withdrawals, beginning at the
end of year 8, with the first withdrawal of $1000 with subsequent withdrawals decrease at the
rate of 5% over previous year's withdrawal? The interest rate is 10%.
Enter your answer as follow: "123456", do not use "$" or ",".
3508.64
Hint:
Draw a cash flow diagram.
Try to solve this problem in two parts.
- Is this a linear gradient or a geometric gradient?
- If this is a linear gradient, remember that the equation applies to increasing gradient
only.
- If this is a geometric gradient, then the equation applies for both increasing and
decreasing gradient. When using it for decreasing gradient, remember to set the g to a
negative value.
- Remember that the P always occurs one time period before the first repeated cash flow
(either A or G).
