Tvm and Inflation Practice Problems

300 Words2 Pages
1. Your savings of $200,000 is earning 8% interest. A. If retirement is scheduled in 15 years and inflation is expected to average 5% annually during that period, will you have accumulated the $300,000 in purchasing power that you deem necessary? If not, by how much will you be short? B. Assume the same inflation rate and that you have $300,000. You want to withdraw that money in five annual installments that provide you with the same purchasing power each year. How much is each installment in nominal terms and in real terms? |Installment |1 |2 |3 |4 |5 | |Nominal | | | | | | |Real | | | | | | 2. Over the past several years, I have been able to save $14,188. I want to establish my own business in 5 years and I feel that I will need $50,000 in order to do so. a. If I can earn 12% on my investments, how much will I have in 5 years? How much more will I need? b. Given your answer to part (a), how much must I put away each year to achieve my goal? Assume I put away the same amount each year and I can still earn 12% annually. c. Referring back to the original problem, suppose I believe I will need the $50,000 in terms of today's dollars. If the inflation rate is 5%, how much short will I be of my goal? d. Given your answer for part (c), in real terms how much must I put away each year to achieve my goal. Again, assume I put away the same (real) amount each year, the inflation rate is 5%, and I can
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