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.

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