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

Constant dollar payments = payment/(1 + inflation rate)ⁿ

inflation rate = 3%

interest rate = 5% and payment = $ 100

time period = 10 years

T	Constant $ payment
1	97.09
2	94.26
3	91.51
4	88.85
5	86.26
6	83.75
7	81.31
8	78.94
9	76.64
10	74.41

FV = 97.09 x (1 + 5%)⁹ + 94.26 x (1 + 5%)⁸ + ...... + 74.41 x (1 + 5%)⁰

FV = $ 1085.65