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life). If you expect to earn 5 percent per year on average (the discount rate) and
withdraw $5,000 per month, how long will it take to burn through your savings (in
other words, how long can you afford to live)? The answer, as you can see in Figure
31.5 is 264 months or 22 years.
In this last example, assume that you invest $30,000 (say, in a piece of equipment),
and that this investment will generate $500 net income per month over the next seven
years. If you purchase this piece of equipment or make any other such investment,
what is your compounded average annual rate of return? The answer, as shown in
Figure 31.6, is 0.84 percent per month or 10.13 percent per year.
As you can see, the family of annuity functions looks and feels the same for all
functions. In the next chapter, you will practice using these and similar functions in
an amortization table.
Number of Periods Function
FIGURE 31.6 The Rate Function Menu
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