Question 1118880: A company invests P10,000 today to be repaid in five years in one lump sum at 12% compounded annually. If the rate of inflation is 3% compounded annually, how much profit in present day pesos is realized over five years?
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! the investment is 10,000 pesos.
it has to be repaid in 5 years in one lump sum at 12% compounded annually.
the rate of inflation is 3% compounded annually.
the profit in present day pesos would be 10,000 * 1.12^5 / 1.03^5.
this is equal to a future value of 15,202.11417.
the profit is that minus 10,000 = 5,102.11417 in today's pesos.
without inflation, the future value would have been 10,000 * 1.12^5 = 17,623.41683.
however, what cost 1.00 today, costs 1.00 * 1.03^5 = 1.159274074 in five years.
therefore, the buying power of 17,623.41683 in today's pesos. is equal to that divided by 1.159274074 = 15,202.11417.
the profit is therefore only 5,202.11417 in today's pesos.
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