solve using engineering economics way 2. Suppose inflation averages 3% per year

Question

solve using engineering economics way

2. Suppose inflation averages 3% per year and the real (inflation-free) rate return for a fun is 4% per year a. What is the combined rate of return for the fund? I invest $50,000 in the fund and make two equal withdrawals, one at the end of year 1 and the other at the end of year 2. The balance in the account after the second withdrawal is zero. Express the amounts withdrawn at the end of year 1 and year 2 using: b. Then-current dollars Constant (inflation-free) dollars

Explanation / Answer

Answer a)

Combined rate of return for the fund=Inflation rate+real rate of return=3%+4%=7%

Ans b)

Lets assume X amount to be withdrawn from account

((50000-X)1.07)-X)=0

50000(1.07)^2-X(1.07)^2-X=0

(50000-X)(1.07)^2=X

50000(1.07)^2=X(1+(1.07^2))=2.1449X

50000(1.07)^2/2.1449=X

X=$26688.89

If Inflation free rate is considered then we will assume 4% instead of 7%

50000(1.04)^2/(1+(1.04)^2)=X

X=$25980.01

(

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