Question

Suppose you purchase an insurance policy today that will provide you with $250,000 when you retire in 25 years. Assuming an annual inflation rate of 5%, what will be the purchasing power (in dollars) of $250,000 in 25 years?

a) $89,286
b) $132,860
c) $163,492
d) $190,635

Answer 1

The purchasing power of $250,000 in 25 years, given a 5% annual inflation rate, is calculated using the present value formula.

After the calculation, the present value is determined to be $73,848.14, which does not match any of the provided answer choices, indicating a potential discrepancy.

Step-by-step explanation:

The question is asking to calculate the purchasing power of $250,000 in 25 years given an annual inflation rate of 5%. To find the answer, we use the formula for the present value of a future amount of money when adjusted for inflation:

PV = FV / (1 + i)^n

Where:

• PV = present value (purchasing power today)
• FV = future value ($250,000)
• i = inflation rate (5% or 0.05)
• n = number of years (25)

Plugging the values into the formula:

PV = $250,000 / (1 + 0.05)^25
PV = $250,000 / (1.05)^25
PV = $250,000 / 3.38637
PV = $73,848.14

However, this value does not match any of the answer choices provided. It's possible there may be a discrepancy in the calculation or provided options.

To ensure accuracy, please double-check the values and calculations. Since none of the provided answer choices are correct based on the above calculation, it's important to revisit the question and options for potential errors or omissions.