a question from qbank on annuity: How much should an investor have in a retirement account on his 65th birthday if he wishes to withdraw $40,000 on that birthday and each of the following 14 birthdays, assuming his retirement account is expected to earn 14.5%? A) $234,422. B) $274,422. C) $272,977. Your answer: A was incorrect. The correct answer was B) $274,422. This is an annuity due so set your calculator to the BGN mode. N = 15; I/Y = 14.5; PMT = –40,000; FV = 0; CPT ? PV = 274,422.50. Switch back to END mode. Actually from the question above, how do i know that this is an annuity due question? i calculate using the end mode instead of bgn mode. Thanks
draw a timeline for all such tvm problems. he wishes to draw on that birthday itself. so it is an annuity due. if it had been one year later - it would have been a regular annuity. also recognize that an PV(annuity due) = PV(Annuity) + PMT.
put another way - you want to know how much money he needs at the time payments begin.
Yes, drawing a timeline always helps even for the simple problems because then you know exactly how many periods there are and whether it’s OA or AD.