Question

Suppose you have $300,000 cash today and you can invest it to become worth $3,000,000 in 14 years. What is the present purchasing power equivalent of this $3,000,000 when the average inflation rate over the first six years is 5% per year, and over the last eight years it will be 9% per year? Click the icon to view the interest and annuity table for discrete compounding when = 5% per year Click the icon to view the interest and annuity table for discrete compounding when = 9% per year. The present purchasing power equivalent is thousand. (Round to two decimal places.)

Answer 1

Solving by Back Calculation:

Case 1: When average inflation rate = 9% for last 8 years (7^th to 14^th year)

Present Purchasing Power of Future Amount = Future Amount × (P/F r, n)

=$ 3,000,000 × (P/F 9%, 8 years)

= $3,000,000 × 0.5019

= $1,505,700

Case 2: When average inflation rate = 5% for first 6 years (1^st to 6^th year)

Present Purchasing Power of Future Amount = Future Amount × (P/F r, n)

=$1,505,700 × (P/F 5%, 6 years)

= $1,505,700 × 0.7462

= $1,123,553.34

∴ The Present Purchasing Power equivalent is $1,123,553.34

Thank YOu.