Question

Paul just graduated from college and landed his first "real" job, which pays $43,200 a year. In 10 years, what will he need to earn to maintain the same purchasing power if inflation averages 4 percent? The future value, FV, Paul will need to earn if inflation averages 4 percent is $   

Answer 1

Since the average inflation is 4%, each year, his earnings must have a 4% increase in order to mantain the same purchasing power. Then, each year, his income must grow by a factor of 1.04.

After 10 years, his earnings must have grown by a factor of 1.04^(10) to mantain the same purchasing power:

$43,200\times1.04^{10}=63,946.55311\ldots$

Then, the future value that Paul will need to earn to mantain the same purchasing power if inflation averages 4% is:

$\text{ \ 63,947}$