Question

Suppose your salary in 2012 is $70,000. Assuming an annual inflation rate of 7%, what salary do you need to earn in 2020 in order to have the same purchasing power? (Round your answer to two decimal places.)

Answer 1

Annual salary(2012) = $70,000

Annual inflation = 7%

Therefore, the salary you need to earn in 2020 in order to have the same purchasing power can be calculated below

$2020-2012=8\text{ years}$$FV=PV\times(1+r)^n$

where

n = 8

r = 7/100 = 0.07

PV = 70, 000

$\begin{gathered} FV=70,000(1+0.07)^8 \\ FV=70000(1.07)^8 \\ FV\text{ = 70000}\times1.71818617983 \\ FV=120273.032588 \\ FV=\text{ \ }120,273.03 \end{gathered}$

The salary you need to earn in 2020 to have the same purchasing power = $120, 273.03