Question

Suppose you opened a new account and invested $10,000 in your asset in the beginning of 2014, that on June 30, 2016 you invested an additional $5,000, and that on January 31, 2017 you withdrew $2,000.  

If there were no other cash flows coming into or out of the account, what was the dollar balance at the end of 2018 (yes, do include the effect of the return earned during December 2018)?

Rate of return -0.88

Answer 1

Step 1: Calculate Dollar Balance at Beginning of 2018

The dollar balance at the beginning of 2018 is arrived as below:

Total Balance at the Beginning of 2018 = Amount Invested at the Beginning of 2014 + Amount Invested on June 30, 2016 - Amount Withdrawn on January 31, 2017

Substituting values in the above formula, we get,

Dollar Balance at the Beginning of 2018 = 10,000 + 5,000 - 2,000 = $13,000

______

Step 2: Calculate Dollar Balance at the End of 2018

The dollar balance at the end of 2018 is determined as follows:

Total Balance at the End of 2018 = Total Balance at the Beginning of 2018*(1+Rate of Return)

Substituting values in the above formula, we get,

Dollar Balance at the End of 2018 = 13,000*(1+.88) = $24,440

______

Notes/Assumptions:

1) Since, nothing has been specified, it has been assumed that no amount of interest has been earned during the period 1st January 2014 and 31st December 2017.

2) The rate of return is assumed to be .88 (as given in the question). The answer may differ if it is .88%. If the rate of return is .88%, the dollar balance at the end of 2018 would be $13,114.40.