Question

If the $10.61 cost in 1972 is equal to $68.69 in 2013, then what rate of inflation, i%=?, was used to determine the 2013 costs? Express your answer as a %.

Answer 1

Answer:

inflation rate = 4.66%

Explanation:

we can determine the inflation rate using the future value formula:

future value = present value x (1 + i)ⁿ

• future value = $68.69
• present value = $10.61
• n = 41 years
• i = inflation rate ?

$68.69 = $10.61 x (1 + i)⁴¹

(1 + i)⁴¹ = $68.69 / $10.61 = 6.474081056

⁴¹√(1 + i)⁴¹ =  ⁴¹√6.474081056

1 + i = 1.0466

i = 1.0466 - 1 = 0.0466 = 4.66%