Question

You will receive $5,000 a year in real terms for the next 5 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 9.725 percent and the inflation rate is 2.45 percent. What are your winnings worth today in real dollars?

Answer 1

The amount is computed as shown below:

= Future value / (1 + r)ⁿ

r is computed as follows:

= [ (1 + nominal rate) / (1 + inflation rate) ] - 1

= [ (1 + 0.09725) / (1 + 0.0245) ] - 1

= 0.071010249

So, the amount will be as follows:

= $ 5,000 / 1.071010249¹ + $ 5,000 / 1.071010249² + $ 5,000 / 1.071010249³ + $ 5,000 / 1.071010249⁴ + $ 5,000 / 1.071010249⁵

= $ 20,445.65 Approximately

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