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$100,000 is deposited in a bank account paying 8% interest each year.
Required:
Calculate the maximum sum that can be withdrawn from the account at
the end of each year in perpetuity./Answer: Maximum withdrawal = $100,000 × 0.08 = $8,000 per annum in
perpetuity.Please can you explain the logic behind the answer and why they have multiplied 0.08 (compound interest) with the principal? I don’t understand it.
This has nothing to do with compounding interest.
In the first year they will get interest of 8% x 100,000 = 8,000 added to the balance. If they take out 8,000 they will be left with 100,000 which will earn then 8,000 in the second year. They can take this 8,000 out and do the same every year in perpetuity.
If they were to take out more than 8,000 then they would be left with less than 100,000 in the account and therefore would get interest of less than 8,000 in the following year. So 8,000 is the maximum amount that they can take out of the account each year.
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