2. A depositor puts $25,000 in a saving account that pays 5% interest, compounded semiannually. Equal annual withdrawals are to be made from the account, beginning one year from now and continuing forever. What is the maximum annual withdrawal.

The correct answer is $1265.60.

Explanation:

According to the scenario, the given data are as follows:

Present Value (PV) = $25,000

Rate of interest = 5%

Rate of interest (semi annual) (r) = 2.5%

Time period (semi annual) = 2

So, First we calculate the effective annual interest rate,

Effective annual interest rate = (1 + r) ^n = (1.025) ^2 - 1

=5.0625%

So, Annual Withdrawal = PV * Effective annual interest rate

by putting the value, we get

Annual withdrawal = $25,000 * 5.0625%

= $1265.60