Question

Suppose you have ​$ cash today and you can invest it to become worth ​$ in years. What is the present purchasing power equivalent of this ​$ when the average inflation rate over the first years is ​% per​ year, and over the last years it will be ​% per​ year?

Answer 1

Answer: $900,599.04

Explanation:

The present purchasing power equivalent is the present worth of this investment.

The investment will earn 5% for the first 7 years and then 9% for the next 10.

As there are different rates, the present worth calculation will have to reflect that.

At the end of the first 7 years, the present worth of the invested amount given 10 more years of investing at 9%. The Present worth is;

= 3,000,000(Present worth factor, 9%, 10 years)

= 3,000,000 * 0.4224

= $1,267,200

Then what is the Present worth of $1,267,200 in the current year given that it will be invested for 7 years at 5% to get to $1,267,200.

= 1,267,200 (Present worth factor, 5%, 7 years)

= 1,267,200 * 0.7107

= $900,599.04