- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 4. The Future Value and Present Value of a Series of Equal Cash Flows (Ordinary Annuities, Annuity Dues, and Perpetuities)

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**CFA Practice Question**

A beginning amount of $75,000 is invested in a money market account. At the beginning of each year, a withdrawal of $7,073.07 is to be made, to pay insurance premiums. The money market account pays an interest rate of 8%. How many withdrawals will this account support?

A. 21

B. 20

C. 17

**Explanation:**BGN; PV = -$75,000; PMT = $7,073.07; i = 8%; CPT n = 20

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**User Contributed Comments**
12

User |
Comment |
---|---|

flemato347 |
when trying to solve this problem by using the present value annuity equation I arrive at: 75000=7073.07{1-(1/1.08)^n)/.08); that can be condensed to 10.60={1-(1/1.08)^n)/.08} but where would you go from here to solve for the ln of n? thanks. |

topdan |
I get 24,5... |

tanyak |
me too...I don't really get this END function on the Texas calculator...can someone explain how to solve this on the calculator? |

AlexYuen |
75,000 = 1.08 x PV (OA) 75,000/1.08 = PV(OA) Hence, PV = 75,000/1.08, PMT=7073, FV=0,I=8 |

wuyi |
Note: Cash withdraw is at the beginning of each year! |

coolnan |
Texas BAII plus: 2ND BNG 2ND SET 2ND QUIT 7037.07PMT 8 I/Y -75000PV CPT N = 20.25 |

Profache |
If the problem states witdrawns/deposits are made in the BEGINING of the period, you set the BEGIN funciton in the calculator. If made at the end of each year, set the function to END |

phillyj |
on BA-II, how do you change to a annuity due setting? |

nishanttcs |
Earlier I too got 24.5 as the answer. However there is a trick here. The time we deposit 75000, we take out 7073.07 to pay 1st installment. Now are left with 67926.93 (PV). Use i = 8%, PMT = 7073.07. You get NPER = 19 (exactly). Hence total installments supported are 19+1 = 20 |

rjdelong |
i also used nishanttcs method, but then I didn't know how to set my calc to use BGN... so this was how to compensate |

merc10112 |
Do not work these problems out by hand...use your calculator instead. Save your time for other questions |

Lolalolita |
nishanttcs, excellent trick! setting the ba ii to BGN mode saves you time. |