Question

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. :-) )

Answer 1

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:

$20,000 \times (1+0.10)^{20}$

Amount 134,550.00

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

$\frac{Nominal}{(1 + inflation)^{time} } = PV$  

Nominal: 134,550.00

time   20 years

inflation     0.04

$\frac{134550}{(1 + 0.04)^{20} } = PV$  

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