2006 AM Q1 ....Required Return Q

There are two things I don’t understand for this question…

If anyone could explain, that would be great. Thanks.

  1. Why is the return from equity PF (8.5%) added to Cash inflow? isn’t the “growth” unrealized return?

  2. Why are both interest income and growth return not added to cash flow in year 1 (first year of retirement)?