Answer:
$73,070.5
Explanation:
Inflation erodes the value of money. It makes more quantity of money to required to buy the same basket of food and services in the future.
With inflation, to calculate the the quantity of Dollars needed in n years time, we use the formula;
Inflated amount = h × (1 + f)^n
h= amount required today, f - inflation rate, n- number of years
So if Farrell needs $400,000 in 6 years time in real terms, with an inflation of 5% per year, he would need to have a quantity of money equal to
1.05^6 × 400,000 = $536,038.3.
To provide for $536,038.3 in 6 years time, he would need to contribute into a sinking fund on a yearly basis, an equal amount denoted as "A" in the formula below:
FV = A × ((1+r)^n - 1)/r
FV - 536,038.3, r - 8%, n = 6
536,038.3 = A × ((1+0.08 )^(6) - 1)/0.08)
536, 038.3 = A × 7.3359
536,038.3/7.3359 = A
$73,070.5 = A
Farrell should invest at the end of every year
$73,070.5
