Prudential Realty has an escrow account for one of its property management clients that contains $20,000. How long will it take to deplete the account if the client withdraws $5000 now, $4500 one year from now, and amounts decreasing by $500 each year? Assume the account earns interest at a rate of 8% per year.
What will be an ideal response?
20,000 = 5000 + 4500(P/A,8%,n) – 500(P/G,8%,n)
Solve for n by trial and error:
Try n = 5: $19,281 < $20,000
Try n = 6: $20,541 > $20,000
By interpolation, n = 5.6 years
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