Final answer:
To calculate the buying power of $20,000 in today's dollars, we can use the formula: Future Value = Present Value * (1 + Inflation Rate)^Number of Years. The future value of $20,000 after 16 years with a 6% inflation rate is approximately $42,926.
Step-by-step explanation:
To calculate the buying power of $20,000 in today's dollars, we need to take into account the effect of inflation over the 16 years. In this case, the inflation rate is 6% per year.
To find the future value, we can use the formula: Future Value = Present Value * (1 + Inflation Rate)^Number of Years
Using the formula, the future value of $20,000 after 16 years with a 6% inflation rate is approximately $42,926.
Therefore, the buying power of $20,000 when measured in today's dollars is approximately $42,926.
To find out the buying power of the $20,000 in today's dollars given a 6% annual inflation rate over 16 years, we need to calculate the present value of that future amount. This can be done using the present value formula, which takes into account the inflation rate. The formula for the present value is:
PV = FV / (1 + r)n
Where:
PV represents the present value
FV is the future value - which in this case is $20,000
r is the annual inflation rate - which is 6% or 0.06 in decimal form
n is the number of years - which is 16 in this case
Using the formula, we get:
PV = $20,000 / (1 + 0.06)16
Calculating this gives us:
PV = $20,000 / (1.06)16
PV ≈ $20,000 / 2.856 = $7,002.80 (approx.)
Therefore, the buying power of $20,000 at a 6% annual inflation rate over 16 years is approximately $7,002.80 measured in today's dollars.