Felix Jones, a recent engineering graduate, expects a starting salary of $35,000 per year. His future employer has averaged 5% per year in salary in- creases for the last several years. If inflation is esti- mated to be 4% per year for the next 3 years, how much, in year-1 dollars, will Felix be earning each year? What is the differential inflation rate in Felix’s salary?
Year |
Expected salary | Present value factor based on inflation | Value in Year 1 dollars | Average inflation |
0 | 35,000 | 1 |
35,000 |
- |
1 | 36,750 | 0.962 | 35,336.54 | 0.009615 |
2 | 38,587.50 | 0.925 | 35,676.31 | 0.009615 |
3 | 40,516.88 | 0.889 | 36,019.35 | 0.009615 |
Currently Felix's salary is $35,000 i.e. salary in Year 0
Average inflation rate is 0.9615%
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