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27 November, 14:47

You would like to have the current equivalent in terms of today's buying power of $2,500 in 10 years. How much would you have to invest today (in nominal terms) to fund this level of real consumption?

You expect inflation to be 5% per year over that time period. Your investments earn 7% per year in nominal terms.

A. $2,112

B. $2,500

C. $1,271

D. $2,070

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  1. 27 November, 15:01
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    D. $2,070

    Explanation:

    First, convert $2500 real dollar amount at year 10 to to nominal amount;

    If inflation rate is 5% per year, then in 10 years the inflation will compound to the following;

    1.05^ 10 = 1.6289

    Therefore, the nominal amount of your savings would be

    = $2500*1.6289

    = $4,072.25

    Next, that would be your future value (FV), find its present value using the 7% as the discount rate. On a financial calculator, input the following;

    FV = 4,072.25

    I/Y = 7%

    N = 10

    PMT = 0

    then compute present value; CPT PV = $2,070
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