Question

Suppose you have $1,000,000 today and starting a year from now you intend to spend this money over the next 30 years. Assume the nominal rate of interest is 9.2%, inflation rate of 5% and the real rate of interest is 4%. How much can you spend annually in real dollar terms over the next 20 years to ensure constant spending in real terms?

Answer 1

Explanation:

Here Initial amount = $10,00,000

Nominal Interest Rate = 9.2%

inflation  Rate = 5%

Real Interest Rate = 4%

in question it was asked to give in real then we will use the real discount rate to know annual spent amount

Present Value = PMT×PVIFA ( at 4% and 20 years)

Therefore, PMT = Present Value of Cash / PVIFA ( at 4% and 20 years)

= 1000000 / 13.5903

= $73581.75

Where,  PMT = Annual Spent Amount

PVIFA = Present Value interest Factor Annuity