Suppose an insurance agent offers you a policy that will provide you with a yearly income of $230,000 in 30 years. What is the comparable annual salary today, assuming an inflation rate of 4%?. (Round your answer to the nearest cent.)
$ 1
if the salary is s,
s*1.04^30 = 230000
s = 70,913.29
To calculate the comparable annual salary today, we need to adjust the future income for inflation. Inflation reduces the purchasing power of money over time, so the future income needs to be adjusted to reflect today's value.
The formula to adjust for inflation is:
Adjusted Value = Future Value / (1 + Inflation Rate)^Number of Years
First, let's calculate the adjustment factor using the formula:
Adjustment Factor = 1 / (1 + Inflation Rate)^Number of Years
In this case, the future income is $230,000, the inflation rate is 4%, and the number of years is 30. Plug these values into the formula:
Adjustment Factor = 1 / (1 + 0.04)^30
Now we can calculate the adjusted value (comparable annual salary today) using the formula:
Comparable Annual Salary Today = Future Income * Adjustment Factor
Plug in the values:
Comparable Annual Salary Today = $230,000 * Adjustment Factor
Now calculate the Adjustment Factor using a calculator or spreadsheet:
Adjustment Factor ≈ 0.3393
Finally, calculate the Comparable Annual Salary Today:
Comparable Annual Salary Today ≈ $230,000 * 0.3393 ≈ $78,019.
(Round your answer to the nearest cent.)