In: Finance
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.
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