Question

Alan’s dad might not have given him any money, but Alan received a $100,000 inheritance from a long lost relative. He wants to save the money for the future, but he doesn’t trust banks, or investments, so he stashes his money in a trunk. Over the next 35 years, the inflation averages 3.25%. A) What is the purchasing power of the $100,000 after 35 years? B) How much would Alan have to have inherited to be able to afford a $100,000 car in 35 years using this savings method?

Answer 1

(A)

Amount inherited = $100,000

Inflation rate (r) = 3.25% or 0.0325

Time period (n) = 35 years

Calculate the purchasing power of the $100,000 after 35 years -

Purchasing power = Amount inherited/(1+r)ⁿ

Purchasing power = $100,000/(1+0.0325)³⁵

Purchasing power = $100,000/3.0630 = $32,647.73

The purchasing power os the $100,000 after 35 years is $32,647.73

(B)

Calculate amount to be inherited -

Amount = Amount needed after 35 years * (1+r)ⁿ

Amount = $100,000 * (1+0.0325)³⁵

Amount = $100,000 * 3.0630 = $306,300

Alan would have to inherit $306,300 to be able to afford a $100,000 car in 35 years using this savings method.