For a present sum of $640,000, determine the annual worth (in then-current dollars) in years 1 through 4 if the market interest rate is 13% per year and the inflation rate is 5% per year.

Instructions are listed below.

Explanation:

Giving the following information:

The present sum of $640,000.

The market interest rate is 13% per year and the inflation rate is 5% per year.

First, we need to calculate the real interest rate.

Real interest rate= interest rate - inflation rate

Real interest rate= 13 - 5= 8%= 0.08

Now, using the following formula we can calculate the future value on each year:

FV= PV*(1+i)^n

FV1= 640,000*1.08= 691,200

FV2= 691,200*1.08= 746,496

FV3= 746,496*1.08= 806,215.68

FV4= 806,215.68*1.08= 870,712.93

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