Tom buys a rare
stamp for $500. If the annual rate of inflation is
4%, how much should he ask when he sells it in
5 years in order to break even?
To determine how much Tom should ask for the rare stamp in order to break even after 5 years of inflation, we need to take into account the effect of inflation on the value of money.
Here's how you can calculate it:
1. First, calculate the amount of inflation over 5 years. The annual rate of inflation is given as 4%, so we can calculate the cumulative inflation using the formula:
Cumulative Inflation = (1 + Inflation Rate)^Number of Years
Plugging in the values:
Cumulative Inflation = (1 + 0.04)^5
Calculation:
Cumulative Inflation = 1.04^5
= 1.21665 (rounded to 5 decimal places)
2. Next, divide the initial cost of the stamp by the cumulative inflation to adjust for the inflation:
Adjusted Cost = Initial Cost / Cumulative Inflation
Plugging in the values:
Adjusted Cost = $500 / 1.21665
Calculation:
Adjusted Cost = $411.67 (rounded to 2 decimal places)
Therefore, Tom should ask for approximately $411.67 when he sells the stamp in order to break even after 5 years of inflation.