Trent receives a check for $20,000 from his parents for his 20th birthday. He de

Question

Trent receives a check for $20,000 from his parents for his 20th birthday. He decides to deposit this money into an account earning a 9% interest rate compounded monthly, forever.

8 years later, he decides to take $30,000 out of this account. He decides to use this money to make equal payments every year into a separate account earning annual interest until he turns 50.

Trent wants to throw an elaborate 50th birthday party and estimates that it will cost $150,000. If he uses solely the combined sums in both accounts at the time he turns 50, what annually compounded interest rate must he earn in the second account to be able to fund his birthday bash?

Hint: The annuity payments would be 30,000/22 = 1363.6364 per years

Explanation / Answer

N I PV PMT FV 96 0.75 20000 0 ? FV = $40,978.42 40978.42 Then Substract 30K N I PV PMT FV 264 0.75 10978.42 0 ? FV = $78,928.54 78928.616 Then substract 150K to get 71071.46 N I PV PMT FV 22 ? 0.00 30000/22 71071.46 I =7.5%

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