Question

You receive $100 per year for the next 10 years starting 1 year from today for a total of 10 payments. If the interest rate that you receive is 5% per year and the inflation rate is 3% per year, draw the cash flow diagram in constant dollars with a base year of 0. Solve for the future value at year 10 using constant dollar analysis.

Answer 1

Interest rate = 5%

Future value = 100*(1.05)^9/(1.03) + 100*(1.05)^8/(1.03)^2 + 100*(1.05)^7/(1.03)^3 + 100*(1.05)^6/(1.03)^4 + 100*(1.05)^5/(1.03)^5 +100*(1.05)^4/(1.03)^6 + 100*(1.05)^3/(1.03)^7 + 100*(1.05)^2/(1.03)^8 + 100*(1.05)^1/(1.03)^9 + 100*(1.05)^0/(1.03)^10

Future value = $1085.65 (in constant dollars)