Question #273929

Assume the inflation rate is 4% per year and the market interest rate is 5% above the inflation rate.

Determine (a) the number of constant-value dollars 5 years in the future that is equivalent to $30,000

now and (b) the number of future dollars that will be equivalent to $30,000 now.

Expert's answer

The market interest rate is the rate of interest prevailing which is being offered on cash deposits.

Using the formula,we find out nominal rate of interest,

*nr*=*rr*+*i*+(*rr*×*i*)

=12%+5%+(12×5)%

=17.6% *or* 0.176

(where nr=nominal rate,rr=real rate of interest,i=inflation rate)

Using the formula,we find out future value,

*FV*=*PV*(1+*r*)

*F*=2000/(1+0.176)

Hence,correct option is B.

Learn more about our help with Assignments: Engineering

## Comments

## Leave a comment