Reference no: EM132916702

Question - Andrew has just retired and has received a lump sum pay-out of $2,000,000. He invests part of this in a growing perpetuity fund which will pay  him $45,000 in one year's time and grow at 2% pa in perpeturity. This fund earns 5% pa. He puts the rest of the pay-out in another investment in the form of an annuity which earns 3% pa. He wants to make equal annual withdrawals over the next 5 years from this investment annuity, to fund a few extravagances, leaving a balance of zero,

Required -

(i) Calculate how much Andrew has invested in the growing perpetuity fund.

(ii) Show how much extra Andrew can expect to spend each year (assuming five start-of-year withdrawals), over the next 5 years from the investment annuity. Note: ignore tax in your calculations.