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Inflation and future value

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As part of your financial planning, you wish to purchase a new care exactly 5 years from today. The car you wish to purchase costs $14,000 today, and your research indicates that its price will increase by 2 percent to 6 percent over the next 5 years.

a) estimate the price of the car at the end of 5 years if inflation is
(1) 2 percent per year
(2) 6 percent per year

b) how much more expensive will the car be if the rate of inflation is 6 percent rather than 2 percent?

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Solution Summary

This solution helps go through consideration of inflation and future value with regards to purchasing a car.

Solution Preview

Let me first introduce the FV formula to you.

FV = PV(1 + r)^n, where FV is ...

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