Question

Ontario passed a law in 1996 that the names of all public servants earning $100 000 or more will be published starting 1997. This year (2013), Ontario is planning to revise the amount to an equivalent purchasing power amount in 2014. What is the amount in 2014, beyond which the names of the Ontario's public servants should be published, assuming the recommended discount rate is 2.5% per year?

Answer 1

The problem is indirectly based on the concept of Time Value of Money (TVM) which states that money worth today is more than the money worth tomorrow. The concept of TVM helps in comparing the monies of two different time periods.

So, the amount received in 1996 will be more in worth or in purchasing power than the same amount in 2013. In order to compare the purchasing power of $100000 in 2013 with 1996, it has to be compounded at the rate given.

We have, Sum = $100000
Time, n = 17 years
Discount Rate, k = 2.5% or 0.025

Amount = $152161.82 approx.

Therefore, the revised amount in 2013 after adjusting for the purchasing power will be $152161.82.