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Chapter 20. Building Discount Formulas > Taking Inflation into Account

Taking Inflation into Account

The future value tells you how much money you'll end up with, but it doesn't tell you how much that money is worth. In other words, if an object costs $10,000 now and your investment's future value is $10,000, it's unlikely that you'll be able to use that future value to purchase the object because it will probably have gone up in price. That is, inflation erodes the purchasing power of any future value; to know what a future value is worth, you need to express it in today's dollars.

For example, suppose that you put $10,000 initially and $100 per month into an investment that pays 5% annual interest. After 10 years, the future value of that investment will be $31,998.32. Assuming that the inflation rate stays constant at 2% per year, what is the investment's future value worth in today's dollars?


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