As part of your financial planning, you wish to purchase a new car exactly 5 yea

Question

As part of your financial planning, you wish to purchase a new car exactly 5 years from today. The car you wish to purchase costs $14,000 today, and your research indicates that its price will increase by 2% to 4% per year over the next 5 years. Estimate the price of the car at the end of 5 years if inflation is (1) 2% per year and (2) 4% per year. How much more expensive will the car be if the rate of inflation is 4% rather than 2%? Estimate the price of the car if inflation is 2% for the next 2 years and 4% for 3 years after that.

Explanation / Answer

Current Price of the car 14000 Cost of the car after 5 years with inflation @2%=14000*(1.02^5) 15457.131 Cost of the car after 5 years with inflation @4%=14000*(1.04^5) 17033.141 Cost of the car after 5 years with inflation @2% for 2years and 4% for next 3years=14000*(1.02^2)*(1.04^3) 16384.32

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