Engineering Board Exam Reviewer · Inflation and Real Interest Rates · hard
A retiree has P2,000,000 earning 8% per year while inflation is 4%. The retiree wants year-end withdrawals for 10 years that rise with inflation (each withdrawal 4% larger than the last). Find the first withdrawal.
- P254,484.91
- P298,058.98
- P244,697.03
- P200,000
Answer
A. P254,484.91
Solution
The withdrawals form a geometric series with g=0.04 and i=0.08: 2,000,000=X 1-(1.04/1.08)100.08-0.04. So X= 2,000,000(0.04)1-(0.96296)10=P254,484.91.
More Inflation and Real Interest Rates questions
- A project yields P500,000 per year in today's (constant) pesos for 10 years, so the actual receipts rise with 5% annual inflation. The…
- An item costs P100,000 today. If inflation is 6% per year, how much will an equivalent item cost in 5 years?
- A bank pays 12% per year while inflation is 5% per year. Find the real interest rate.
- The real (inflation-free) interest rate is 6% and inflation is 4% per year. Find the market (combined) interest rate.