Question

ou just made an investment in an insurance policy that is guaranteed to pay you $2.8 million 20 years from now provided you live that long. What will be the purchasing power of that amount with respect to today’s dollars if the market interest rate is 8% per year and the inflation rate stays at 3.9% per year over the 20-year period?

The purchasing power of this amount is $_____.

Answer 1

Investment = 2800000

inflation = 3.9%

n=20 years

Purchasing power = 2800000/(1+0.039)^20

= 2800000/2.149368

= 1302708.51