You decide to invest $20,000 today in your favorite video game company stock. The stock is expected to grow at a rate of 10% per year for 20 years. When you sell the stock in 20 years, how much will it be worth in terms of TODAY's spending power (assume a 4% rate of inflation). (You want to know how many rib eye steaks you will be able to buy in 20 years when you sell the stock. :-) )

Question

contestada

Respuesta :

TomShelby TomShelby · Answer 1 · 2019-10-01T01:38:27+02:00

Answer:

purchase power: 61,406.86

Explanation:

The stock will grow at 10%

and there is 4% inflation wich erodes the purchase power in the future.

Future value of the stocks:

[tex]20,000 \times (1+0.10)^{20}[/tex]

Amount 134,550.00

Now, we will adjust for inflation of 4% over a period of 20 years:

[tex]\frac{Nominal}{(1 + inflation)^{time} } = PV[/tex]

Nominal: 134,550.00

time 20 years

inflation 0.04

[tex]\frac{134550}{(1 + 0.04)^{20} } = PV[/tex]

PV 61,406.86

Purhcase power of the stock 20 years from now at expected grow rate of 10% and 4% inflation: 61,406.86