Question

Sally has invested $10,000 now and wants to earn a real interest rate of 10% per year. Assume that the inflation rate is 7% per year. Determine the future worth Sally has to receive 10 years from now? a) $62, 338 b) Unknown c) $42, 338 d) $52, 338

Answer 1

Results are below.

Step-by-step explanation:

Giving the following information:

Inflation rate= 7%

Real rate of return= 10%

Present value (PV)= $10,000

Number of periods (n)= 10 years

The real rate of return incorporates the effect of the inflation rate. Therefore, the nominal rate of return:

Nominal rate of return= 0.1 + 0.07= 17%

To calculate the Future Value, we need to use the following formula:

FV= PV*(1 + i)^n

FV= 10,000*(1.17^10)

FV= $48,068.28

This is the nominal value received after ten years.

If Sally wants to determine the real value of the investment after 10 years, we must use the real rate of return:

FV= 10,000*(1.1^10)

FV=$25,937.42