Question

In: Economics

4. To retire at a decent age and move to Hawaii, an engineer plans to trust...

4. To retire at a decent age and move to Hawaii, an engineer plans to trust her account to an investment firm that promises to make a real rate of return of 8% per year when the inflation rate is 2% per year. The account currently is valued at $290,000 and she wants to retire in 12 years. Determine how much (in then-current dollars) will be in the account for the realized rate of return to be a real 8% per year.

Solutions

Expert Solution

Given real interest rate of 8%, inflation of 2%, pv = 290000. nper = 12

We need to find how much this 290000 will be in 12 years. i.e we need to determine the FV.

I have shown two answers with inflation accounted for and unaccounted for.

FV with inflation accounted for =FV(10%,E6,0,-E5,0)

=910,144.23

Here the interest rate to be used is 10% (8%+2%) . Give negative sign to pv value.

FV with inflation unaccounted for =FV(E3,E6,0,-E5,0)

=730,269.33

Here the interest rate to be used is 8% sicne we are considering only the real interest rate.

Rahul Sunny answered 7 months ago
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