Suppose you invest $10,000 per year for 10 years at an average return of 5.5%. The average future inflation rate is 2% per year.

Determine the purchasing power, in today's dollars, of your investments.

• $105,623
• $111, 432
• $135, 835
• $140,253
• $142,111

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 20, 2023.

Solution: B

The future value of the investments equal:

1.055 × ($10,000/0.055 )(1 − 1/1.055¹⁰ ) × (1.055)¹⁰ = $135, 835 (end of year 10)

And the purchasing power, in today's dollars, equals:

$135,835/1.02¹⁰ = $111, 432

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.