Suppose you have $1,000 to invest in a large-company stock for three years. The average annual rate of return is 5.85%. What is the real future value of your investment after three years?

Question

Quizplus · Accepted Answer

Using the formula for compound interest, the future value of the investment after three years would be:

FV = PV (1 + r)^n
FV = $1,000 (1 + 0.0585)^3
FV = $1,185.97

However, this is the nominal value, meaning it doesn't take into account inflation. To find the real future value, we need to adjust for inflation using the following formula:

Real FV = Nominal FV / (1 + inflation rate)^n

Assuming an inflation rate of 2%, the real future value would be:

Real FV = $1,185.97 / (1 + 0.02)^3
Real FV = $1,058.50

Therefore, the best choice is C, with a real future value of $1,058.50.

Suppose You Have $1,000 to Invest in a Large-Company Stock