Question

Your father is now planning to retire, and his employer has promised him a guaranteed, but fixed, income of $50,000 per year for the rest of his life. If the rate of inflation is 5% per year, how much in current dollars will the payment at the end of 20th year be worth?
(A) $20,293.43
(B) $19,798.47
(C) $18,844.47
(D) $19,315.58
(E) $20,800.77

Answer 1

Answer:

(C) 18,844.47

Explanation:

You need to use the  Inflation-Adjusted Return formula:

$InflationAdjustedReturn=\frac{1+return}{1+inflationrate}-1$

So, basically you need to calculate it year by year. You can use excel, or an online calculator. I will attached you a link where you can find a good one. But this would be the process

$InflationAdjusted ReturnYear1=\frac{1+return}{1+inflationrate}-1=\frac{1+50000}{1+0.05}-1=47,619$

$InflationAdjusted ReturnYear2=\frac{1+returnyear1}{1+inflationrate}-1=\frac{1+47,619}{1+0.05}-1=45,351$

$InflationAdjusted ReturnYear3=\frac{1+returnyear2}{1+inflationrate}-1=\frac{1+45,351}{1+0.05}-1=43,192$

And so on...

$InflationAdjusted ReturnYear20=\frac{1+returnyear19}{1+inflationrate}-1=\frac{1+19,787}{1+0.05}-1=18,844$

Keep in mind that I did not write all decimals. You need to consider them if you want an exact answer

Online calculator:

https://www.ameriprise.com/research-market-insights/financial-calculators/savings-taxes-inflation/