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

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