Finance Question - Formulas

posted by Anonymous

Instead of spending the $50 a month you receive, you decided to invest it in your money market account at your bank. Assuming you will earn an average of 5% each year and inflation is forecasted to 2.5% a year, how much have you effectively earned after ten years? (Hint: must use a two formulas to solve this question) In other words, after you have factored out the effects of inflation, how much purchasing power do you have?


Can you please help me with what two equations I'm supposed to use? I was thinking the first one is the Future Value Annuity:

FVA = 50[(1+(.05/12))^(10x12)-1)/(.05/12))]

but I also wondered if it was just Future Value. Can you help me out with what to do after that?

  1. MathMate

    The FVA formula gives you the effective amount at the future date. You may want to convert the amount back to present value, using the inflation rate.
    The formula is
    PV=FV/(1+i)^n
    where
    i=inflation rate
    n=number of years.

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