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23 January, 23:18

For a present sum of $640,000, determine the annual worth (in then-current dollars) in years 1 through 4 if the market interest rate is 13% per year and the inflation rate is 5% per year.

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  1. 23 January, 23:48
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    Instructions are listed below.

    Explanation:

    Giving the following information:

    The present sum of $640,000.

    The market interest rate is 13% per year and the inflation rate is 5% per year.

    First, we need to calculate the real interest rate.

    Real interest rate = interest rate - inflation rate

    Real interest rate = 13 - 5 = 8% = 0.08

    Now, using the following formula we can calculate the future value on each year:

    FV = PV * (1+i) ^n

    FV1 = 640,000*1.08 = 691,200

    FV2 = 691,200*1.08 = 746,496

    FV3 = 746,496*1.08 = 806,215.68

    FV4 = 806,215.68*1.08 = 870,712.93
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