Suppose an insurance agent offers you a policy that will provide you with a yearly income of $290,000 in 25 years. What is the comparable annual salary today, assuming an inflation rate of 4%?. (Round your answer to the nearest cent.)
To find the comparable annual salary today, we need to adjust the future income of $290,000 for inflation. Here's how we can calculate it step by step:
1. First, we need to account for the effect of inflation over 25 years. We can do this by using the formula for compound interest:
Future Value = Present Value * (1 + interest rate)^n
where:
Present Value = $290,000 (future income)
Interest Rate = 4% (inflation rate)
n = 25 (years)
Plugging in these values, we have:
Future Value = $290,000 * (1 + 0.04)^25
2. Calculate the future value:
Future Value = $290,000 * (1.04)^25
Future Value = $784,175.86 (rounded to the nearest cent)
3. Now that we have the future value, we need to find the comparable annual salary today. To do this, we divide the future value by the number of years:
Comparable Annual Salary Today = Future Value / n
Comparable Annual Salary Today = $784,175.86 / 25
4. Calculate the comparable annual salary today:
Comparable Annual Salary Today = $31,367.03 (rounded to the nearest cent)
Therefore, the comparable annual salary today, accounting for an inflation rate of 4%, would be approximately $31,367.03.