For a present sum of $740,000, determine the annual worth (in then-current dollars) in years 1...

For a present sum of $740,000, determine the annual worth (in then-current dollars) in years 1 through 3 if the market interest rate is 10% per year and the inflation rate is 4% per year. The annual worth is $___ .

The answer is not 1107923.55.

Expert Solution

Nominal Interest Rate : (1 + real interest rate) * (1 + inflation rate) -1

= ( 1 + 0.10) * (1+0.04) -1

= 0.144

Annuity Factor : (1 – (1+0.144)^-3)/0.144

=2.306138

Therefore, annual worth= 740,000/2.306138

= $ 320,882.79

jeff jeffy answered 2 years ago

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