An amateur wants to go pro 10 years from now. The amateur is interested to know...

An amateur wants to go pro 10 years from now. The amateur is interested to know how much it would cost him to order a custom bike to be built with the following components

Item	Actual cost (in dollars $)	Cost is going to inflate a rate X% per year (in percent %)
Frame	3500	4.5
Tires	1200	7
Gears	1800	5
Brakes	1250	3
Seat	250	2.5
Finish	400	8

Compare the current total value of all items versus the total value by 10 years considering inflation. Determine the average inflation rate of total costs during that period.

Expert Solution

Note: I have assumed the cost of the tires includes 2 tires.

Future Value = Present Value * (1 + Inflation Rate)10

Cost of Bike Today = $8,400
Cost of the bike after 10 years = $13,591.47

Average Inflation Rate = [(Future Value / Present Value)(1/10)] - 1
= [(13,591.47 / 8,400)(1/10)] - 1
Average Inflation Rate = 4.93%

jeff jeffy answered 1 year ago

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