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Question 9.2: Determine the actual value of the $2500 investment for the h......

Determine the actual value of the $2500 investment for the homeowner of Example 9.1 if the economy experiences an annual inflation rate of 3%.

TABLE 9.2
Average Inflation Rates for Selected Countries

United States Japan Germany France Period/Year
Period
7.1 8.8 5.0 9.8 1971-1980
4.6 2.1 2.5 6.2 1981-1990
2.6 1.0 2.8 1.9 1990-1995
Year
2.8 -0.1 1.2 1.8 1995
3.4 -0.5 1.4 1.8 2000
3.4 -0.6 1.9 1.9 2005
1.0 -1.4 0.4 0.7 2010
Source: OECD, Organization for Economic Cooperation and Development, Economic Statistics, http://www.ocde.org, 2011.
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The composite interest rate can be determined using Equation 9.6:

\theta =\frac{i-\lambda }{1+\lambda }=\frac{0.05-0.03}{1+0.03}=0.01942

With P = \$2500 and N = 15, the investment will accumulate to the total amount F:

F=\$2500*(1+0.01942)^{15}=\$3336

Thus, the future value of the investment when the inflation rate is accounted for is significantly lower than the value found in Example 9.1.

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