Archive / Investment Adviser (Level 2) / Miscellaneous Aspects of Retirement Planning

nism-series-xb-corpus-drawdown-year-5-education-payout[ INVESTMENT ADVISER (LEVEL 2) ]

At the start of Year 5, Mr. Y's corpus is Rs. 2,72,09,779. It earns 8% interest during Year 5 (Rs. 21,76,782), and at the end of Year 5 he pays the Year 1 education cost of Rs. 30,17,036. What is the closing balance of the corpus at the end of Year 5?

[ A ]Rs. 2,50,09,497

[ B ]Rs. 2,72,09,779

[ C ]Rs. 2,63,69,526[ CORRECT ]

[ D ]Rs. 2,93,86,562

Takeaway

After crediting 8% interest to the opening balance and paying the Year 1 education cost of Rs. 30,17,036, the corpus closes Year 5 at Rs. 2,63,69,526, so option C is correct.

Derivation

Closing balance Year 5 = [opening (Rs. 2,72,09,779.20) + 8% interest (Rs. 21,76,782.34)] - outflow (Rs. 30,17,035.78) = Rs. 2,93,86,561.54 - Rs. 30,17,035.78 = Rs. 2,63,69,525.75, rounding to Rs. 2,63,69,526. This tests the correct roll-forward sequence — credit the full year's interest on the opening balance first, then subtract that year's specific education outflow — which is the standard cashflow convention used throughout this case study's balance-tracking table.

Why the others fail

A — Rs. 2,50,09,497

This is the closing balance at the end of Year 6 after paying the Year 2 education fees, one year beyond the Year 5 figure being asked for.

B — Rs. 2,72,09,779

This is the opening balance for Year 5 before that year's 8% interest is credited and the education outflow is subtracted, not the closing figure.

D — Rs. 2,93,86,562

This is the gross balance after crediting 8% interest but before subtracting the Rs. 30,17,036 education outflow, so it overstates the true closing balance.