Question

Suppose you have $100,000 cash today and you can invest it to become a millionaire in 15 years. What is the present purchasing power equivalent of this $1,000,000 when the average inflation rate over the first seven years is 5% per year, and over the last eight years it will be 8% per year?(8. 2.1)

Answer 1

$ Present Value Time Rate 1,00,000 15 years 5% per year- First 7 years 8% per year- Last 8 years Future Value Factor= (1+5/100)^7 x (1+8/100)^8 = (1.05)^7 (1.08)^8 = 1.407 x 1.851 2.604 Present Purchasing power equivalent to $100,000 will be: = Present Value x Future Value Factor = $100,000 x 2.604 = $ 2,60,444

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