You need $60,000 in today\'s buying power, 5 years from now. You can earn 2% APR

Question

You need $60,000 in today's buying power, 5 years from now. You can earn 2% APR in real terms on your investments. How much must you invest (a different amount each year), starting next year for 4 years to just meet your needs, if you expect inflation to be 4% per year? The amount you invest should just maintain the real cash values.

Year 1 Year 2 Year 3 Year 4 $15,585 $16,208 $16,857 $17,531

Year 1 Year 2 Year 3 Year 4 $15,882 $16,517 $17,178 $17,865

Year 1 Year 2 Year 3 Year 4 $14,843 $15,437 $16,054 $16,696

Year 1 Year 2 Year 3 Year 4 $14,101 $14,665 $15,251 $15,861

Explanation / Answer

Amount to be invested in real terms each year=60000/(1.02^4+1.02^3+1.02^2+1.02^1)=14272

Amount to be invested in nominal terms:

Year 1=14272*1.04=14843

Year 2=14843*1.04=15437

Year 3=15437*1.04=16054

Year 4=16054*1.04=16696

Option C

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