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Time Value of Money

Ashley Cambry is planning for her retirement. She already has $12,500 in a retirement plan and will deposit $500 a month for the next 20 years. Her account manger says she will be earning 8.00% on an annual basis on this account at the time of retirement and Ashley plans to withdraw a sum each month during her 15 retirement years and then leave $120,000 to the College at the end of 15 ears to furnish a student lounge. During retirement her account will be earning a 6.00% return on an annual basis.

a. How much will Ashley be able to withdraw each month during retirement?

b. Instead of 6.00% what would Ashley's rate-of-return after retirement have to be so that she could withdraw $3,500 a month and still leave the same amount for the student lounge?

Solution Preview

Please refer attached file for better understanding of formulas in MS Excel.

a)
Present deposit in her account=PV=$12,500
Periodic deposit=PMT=500
Number of periods=NPER=12*20=240 months
Interest rate=RATE=8%/12=0.67% per month

Amount ...

Solution Summary

Solution describes the steps to calculate the monthly amount that Ashley can withdraw in the given case. It also calculates the rate of return that will enable Ashley to withdraw $3500 per month.

$2.19