Question

Government policy (spending) changes inflation from 2.5% to 3.5%. How much less is $1,000,000 in 40 years worth in today's dollars?

Answer 1

Answer)

Calculation of worth of today’s $ 1,000,000 in 40 years with 2.5% inflation rate

Worth in 40 years = $ 1,000,000/ (1 + rate of inflation) number of years

                                 = $ 1,000,000/ (1 + 0.025) 40                 

                                 = $ 1,000,000/ 2.68506

                                 = $ 372,431 (approximately)

Calculation of worth of today’s $ 1,000,000 in 40 years with 3.5% inflation rate

Worth in 40 years = $ 1,000,000/ (1 + rate of inflation) number of years

                                 = $ 1,000,000/ (1 + 0.035) 40                 

                                 = $ 1,000,000/ 3.95926

                                 = $ 252,572 (approximately)

Difference in Value = Worth of $ 1,000,000 in 40 years at 2.50% inflation rate - Worth of $ 1,000,000 in 40 years at 3.50% inflation rate

                                     = $ 372,431 - $ 252,572

                                    = $ 119,859

Therefore if the rate of inflation increases from 2.5% to 3.5%, worth of $ 1,000,000 in 40 years from now will decrease by $ 119,859.