A retired couple has a fixed income of $3,900 per month. Assuming an annual inflation rate of 7% (compounded annually), what is the purchasing power (in dollars) of their monthly income in 5 years? (Round your answer to the nearest cent.)
To calculate the future purchasing power of their monthly income in 5 years, we can use the formula for calculating future value with inflation:
Future Value = Present Value x (1 + Inflation Rate)^Number of years
Plugging in the values:
Future Value = $3,900 x (1 + 0.07)^5
Future Value = $3,900 x 1.40255
Future Value = $5,474.80
Therefore, after 5 years with 7% annual inflation, the purchasing power of their monthly income will be approximately $5,474.80.