investment

Question

Graduating seniors may earn $45000 each year.  If the annual rate of inflation is 2 percent, what must these graduates earn after 20 years to maintain their current purchasing power?  If the rate of inflation rises to 4 percent, will they be maintaining their standard of living if they earn $100000 after 20 years?

Answer 1

a.) A = P (1 + r)^t

 

A = 45000 (1 + 0.02)^20

 

A ≈ use you calculator.

 

b.) A = 45000 (1 + 0.04)^20

 

$100,000 will maintain (or exceed) their initial standard of living if:

 

100000 ≥ 45000 (1 + 0.04)^20

 

100000 ≥ 98600.54

 

So their standard of living will be slightly better.