Question

You receive $100 per year for the next 10 years starting 1 year from today for...

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.

Homework Answers

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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