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Solution 1:
Given:
Income from trust fund in year 0= $40,000
Income from trust fund in year 1= $30,000
Income from trust fund in year 2 = $60,000
Interest rate per annum offered by capital market = 5%
The detailed analysis of inflows and outflows can be understood from below table:
     
    Income
    Investment
    Balance (Excess/shortage)
    Year 0
    $40,000
    $32,000
    $40,000-$32000= $8,000
    Year 1
    $30,000
    $42,000
    $30,000-$42,000= ($12,000)
    Year 2
    $60,000
     
     

In year 0, there will be excess of $8,000 which will be remained after investment of $32,000 out of $40,000 received from trust fund. The rate of return will be 5% on investment. At end of year 1, there will be $30,000 from trust fund and the investment/ consumption required will be $42,000. There is shortfall of $12,000 that need to be arranged. At year 0 there is excess of $8,000 on which there will be income @5% and the total amount available to be used at year 1 will be as below:
= 8000+8000*5%
= $8400
Now the amount needs to be arranged in year 1 = $12,000-8400 = $3600.
This amount will be arranged from capital market @5% and the total amount need to be repaid at year 2 will be $3600 +$3600*.05 = $3780.
The amount which is available for the consumption in year 3 will be = $60,000-$3780 = $56,220. $3,780 will be repaid in year 2 and $56,220 will be as surplus for consumption in year 2.
Solution...