(a) Calculate the perpetual equivalent annual worth in future dollars for years 1 through ? for income of $50,000 now and $5000 per year thereafter. Assume the market interest rate is 8% per year and inflation averages 4% per year. All amounts are quoted as future dollars. (b) If the amounts had been quoted in CV dollars, what is the annual worth in future dollars?
What will be an ideal response?
(a) Use if (market interest rate) to find AW
AW = 50,000(0.08) + 5000 = $9000
(b) For CV dollars, first find P using i (real interest rate); then find A using if
0.08 = i + 0.04 + i(0.04)
i = 0.0385 (3.85%)
PW = 50,000 + 5000/0.0385
= $179,870
AW = 179,870(A/P,8%,3)
= 179,870(0.38803)
= $69,79
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