Time value As part of your financial planning, you wish to purchase a new car ex

Question

Time value As part of your financial planning, you wish to purchase a new car 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% to 4% per year over the
next 5 years.
a. Estimate the price of the car at the end of 5 years if inflation is (1) 2% per year
and (2) 4% per year.
b. How much more expensive will the car be if the rate of inflation is 4% rather
than 2%?
c. Estimate the price of the car if inflation is 2% for the next 2 years and 4% for three years after that.

Explanation / Answer

1. 14,000+(0.02*14000)*5=15400 2. 14000+(.04*14000)*5=16800 3. $16800-15400=$1400 4. 14000+(.02)14000(2)=14560 14560 +(.04*14560*3)= 16307.02

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