Suppose an insurance agent offers you a policy that will provide you with a yearly income of $120,000 in 30 years. What is the comparable annual salary today, assuming an inflation rate of 2%?. (Round your answer to the nearest cent.)
Hi Jacque,
You are looking for the present value of this investment, so...
Interest = principal x rate x time
I = 120,000 x .02 x 1 [which is what it's worth at year 1]
i= $24,000
Good luck,
Donnie
No insurance company works with simple interest over 30 years
let the equivalent current salary be x
x(1.02)^30 = 120 000
x = 120000/1.02^30 = $66, 248.51
u r right
it's compound interest, not simple.
To calculate the comparable annual salary today, we need to adjust the future income of $120,000 to account for inflation over the next 30 years, assuming an inflation rate of 2%.
Step 1: Calculate the future value of the $120,000 income after 30 years.
We can use the formula for future value of a lump sum:
Future Value = Present Value * (1 + Inflation Rate)^Number of Years
In this case:
Present Value = $120,000
Inflation Rate = 2%
Number of Years = 30
Future Value = $120,000 * (1 + 0.02)^30
Step 2: Calculate the equivalent annual salary today.
To do this, we need to adjust the future value to its equivalent value today using the present value formula:
Present Value = Future Value / (1 + Inflation Rate)^Number of Years
In this case, we want to find the present value in today's dollars.
Present Value = Future Value / (1 + 0.02)^30
Step 3: Calculate the comparable annual salary today.
Divide the present value by the number of years (1) to obtain the comparable annual salary today.
Comparable Annual Salary Today = Present Value / Number of Years
Now let's calculate the values using these steps:
Future Value = $120,000 * (1.02)^30 = $237,792.39
Present Value = $237,792.39 / (1.02)^30 = $155,525.99
Comparable Annual Salary Today = $155,525.99 / 30 = $5,184.20
Therefore, the comparable annual salary today, assuming an inflation rate of 2%, is approximately $5,184.20.