What is the real (adjusted for inflation) present value of $104.25 that you could receive one year from now, given that the rate of interest is 4.25 percent and the anticipated rate of inflation is 1 percent?

Question

Quizplus · Accepted Answer

The real present value of future money is calculated by adjusting the nominal amount for inflation and discounting it by the real interest rate. The real interest rate can be approximated by the formula $r = \frac{1 + nominal\ rate}{1 + inflation\ rate} - 1$. Here, $r = \frac{1 + 0.0425}{1 + 0.01} - 1 = 0.031683$. The present value is then calculated as $PV = \frac{FV}{(1 + r)}$, where $FV$ is the future value. So, $PV = \frac{104.25}{1.031683} \approx \$100.97$.

What Is the Real (Adjusted for Inflation) Present Value of $104.25