Suppose the interest rate is expected to stay fixed at 7% for the next 10 years with inflation of 2%. You are offered $ 1,000 starting next year for the next 10 years. Olaf says that your offer is worth at least $10,000, modified using inflation. Mary says that you should you use an annuity symbol with 7% interest rate to help you calculate the present value. Latisha points out that an inflation rate has to be used and then the problem converts to a geometric series. Which one of them offers a good place to start?
1. How much is the first payment worth in 1 year? 2 years? Have you accounted for inflation?
2. How much is the first payment worth right now?
3. Write down the equation of value for all 10 payments.
4. Compute the present value.