If a 20-year investment has a 10% rate of return, $100 is invested annually, and inflation is predicted to be 5%, then $12104.52 will be lost due to inflation.
A broad increase in the cost of goods and services across an economy is referred to as inflation. Each unit of currency may purchase fewer products and services as the general price level rises, hence inflation is associated with a decline in the purchasing power of money.
Annual Payment A = $500
r = 10%
n = 20 years
The FV of the annuity will be zero if there is no inflation.
FV = A * [(1+r)ⁿ⁻¹) / r
FV = 500 * [(1 + 10%)²⁰⁻¹) / 10%
FV = $28637.50 ---- (1)
The real rate of return is r if inflation is 5%. = 10% - 5% = 5%
then the annuity's FV
FV = A * [(1+r)ⁿ⁻¹] / r
FV = 500 * [(1 + 5%)²⁰⁻¹] / 5%
FV = $16532.98 ---- (2)
We discovered from equations 1 and 2 that
Therefore, The money I'll waste on inflationary accounting = 28637.50 - 16532.98 = $12104.52
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