Scenario 12.1: Jennifer has decided to give up her pack-a-day smoking habit and invest the money she would have spent on cigarettes in a retirement account. At $6.00 a pack, Jennifer is currently spending $2,190 per year on cigarettes. Jennifer is 25 years old and plans to retire in 35 years, at age 60. She has chosen a retirement account that will earn a long-term average return of 5 percent per year. Jennifer is currently earning $40,000 annually. Assume that the average annual inflation rate will be 5 percent per year, that the cost of cigarettes will increase with inflation, and that Jennifer's income will also rise with the inflation rate.
-Refer to Scenario 12.1 At the assumed annual inflation rate of 5 percent, approximately how much will the $6.00 pack of cigarettes cost in 30 years, when Jennifer reaches the retirement age of 60?

Question

Quizplus · Accepted Answer

To calculate the future cost of a $6.00 pack of cigarettes in 30 years with an annual inflation rate of 5 percent, you can use the formula for future value in terms of inflation: Future Value = Present Value * (1 + inflation rate)^number of years. Plugging in the values gives: Future Value = $6.00 * (1 + 0.05)^30 ≈ $25.97, which rounds to approximately $26, not an exact match to the provided options. However, the closest provided option to the calculated future value is $33, indicating a possible mistake in the calculation or in the interpretation of the options. The correct approach with precise calculation or rounding might lead to a different choice if the options were accurately reflective of typical outcomes of such a calculation.