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Time Value of Money

Company makes a deposit of $600,000 on 1/1/01 and a deposit of $400,000 on 1/1/03 into an account that pays interst at 6% compounded semiannually. On 1/1/04, Company transfers the entire balance in the account to a new account that pays interest at 8% compounded quarterly. Company then deposits %500,000 into the account on 1/1/05. On 1/1/07, Company transfers the entire balance in the account to a new account that pays interest at 4% compounded annually. On this same day, Company makes the first of 4 equal annual withdrawals designed to deplete the account

**Compute the
1) amount transfered into the new account on 1/1/04
2) amount of interest earned by Company from 1/1/02 through 1/1/06
3) amount transfered on 1/1/07 to the new account
4) amount of the equal annual withdrawal
5) amount of interest earned during the year of 2007
6) balance in the account on 1/1/08, immediately after makin gthe 2nd equal annual withdrawal
7) amount of decrease in the balance of the account from 1/1/08 to 1/1/09

CLUE MUST MATCH::::The balance in the account at 1/1/07, immediately AFTER the 1st withdrawal, is approximately $1,494,195.

Solution Preview

1) amount transfered into the new account on 1/1/04

The balance would be 600,000 for 3 years at 6% semiannual and 400,000 for 1 year. Using the FVIF table at 3% interest ( for semiannual) and 6 years and 2 years period, we get the factors as 1.194 and 1.061. Mutiply and we get the amount as $1,140,800

2) amount of interest earned by Company from 1/1/02 through 1/1/06

The interest till 1/1/04 is 1,140,800-1,000,000=140,800. For 2 years the intrest on 1,140,800 at 8% quarterly compund is 196,217 ( find the amount using the FIVF table 8 ...

Solution Summary

The solution explains how to use time value of money to calculate the present and future values. The amount of interest earned during the year and withdrawals are determined.

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