In order to see the effects of inflation, fill out the following spreadsheet giv
ID: 2796450 • Letter: I
Question
In order to see the effects of inflation, fill out the following spreadsheet given that the compound annual average rate of inflation has been 3 percent. Annual inflation rate 3%
Cumulative inflation after 10 years
Value of $1 after 10 years
Cumulative inflation after 20 years
Value of $1 after 20 years
Cumulative inflation after 30 years
Value of $1 after 30 years
Cumulative inflation after 40 years
Value of $1 after 40 years
Jones, Charles P.; Jensen, Gerald R.. Investments: Analysis and Management, 13th Edition (Page 572). Wiley. Kindle Edition.
Explanation / Answer
Average rate of inflation is 3%
Value of $1 after one year = (1-0.03)*$1 = $0.97
cummulative inflation = curent inflation +historical Inflation
cummulative inflation after 10 years = 3%+3%+3%+3%+3%+3%+3%+3%+3%+3% = 30%
Value of $1 after 10 years = (1-0.30)*$1 = $0.70
cummulative inflation after 20 years =3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%= 60%
Value of $1 after 20 years= (1-0.60)*$1 = $0.40
cummulative inflation after 30 years =3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%= 90%
Value of $1 after 30 years= (1-0.90)*$1 = $0.10
cummulative inflation after 40 years =3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%+3%= 120%
Value of $1 after 40 years= (1-1.20)*$1 = - $0.20