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A painting cost $1,000,000 in 1981, and in 2012 it costs

A painting cost $1,000,000 in 1981, and in 2012 it costs $5,000,000. If the average annual inflation has been 4% over this period, has the real cost of the painting gone up or down, and by how much?. I am retiring with $300,000 in my retirement account.

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A painting cost $1,000,000 in 1981, and in 2012 it costs

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  1. A painting cost $1,000,000 in 1981, and in 2012 it costs $5,000,000. If the average annual inflation has been 4% over this period, has the real cost of the painting gone up or down, and by how much?

  2. I am retiring with $300,000 in my retirement account. This money is invested in a bank which promises 8% annual interest. But I expect inflation to be 5% over the next 30 years. I want to draw an amount from my account every year that will give me a constant standard of living, and that will ensure that I run out of money in exactly 30 years. What formula should I use to guide me in how much to withdraw, and how much, in actual dollars, will I withdraw in the 25th year?

  3. A company just invested $50,000 in a local network. Services provided by the network will bring in $15,000 per year for the next five years. The real MARR is 10% Expected annual inflation is 3% The value of the network, in actual dollars, depreciates by 20% every year. Looking at the pre-tax IRR, is this a good investment?

  4. You borrow $25,000 to buy a car, and sign a contract to pay it back in monthly installments over four years at an index-linked interest rate of 12%. If the annual inflation rate is 4%, how much more do you have to pay in month 20 than you would have if the repayments weren’t index-linked?

  5. You want to invest $1000 in a mutual fund that guarantees a 5% rate of return. Inflation is expected to be 1% per year. How much will you have in your account in 5 years time in today’s dollars?

  6. Placidia is experiencing an inflation rate of 10% per year, whereas its neighbour Termitia is experiencing an inflation rate of 25% per year. The Placidian unit of currency is the placido, whereas the Termitian unit of currency is the termi. One placido is currently worth one termi. How many termis will a placido be worth in ten years time? Am I better off investing in a Placidian bank that offers 20% annual interest, or a Termitian bank that offers 40% annual interest?

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