Suppose you have $5,000 to invest in a large-company stock for 20 years. The average annual rate of return is 8%. What is the real future value of your investment after 20 years?

Question

Quizplus · Accepted Answer

To find the real future value, we need to adjust for inflation. Assuming an average inflation rate of 3%, we can use the real rate of return formula:
Real rate of return = (1 + nominal rate)/(1 + inflation rate) - 1

Real rate of return = (1 + 0.08)/(1 + 0.03) - 1 = 0.0485, or 4.85%

Using the formula for compound interest, we can calculate the future value of the investment:
FV = PV x (1 + r)^n
FV = $5,000 x (1 + 0.0485)^20
FV = $23,305

Therefore, the real future value of the investment after 20 years is $23,305. Answer choice A is the correct answer.

Suppose You Have $5,000 to Invest in a Large-Company Stock