Problema Solution
Megan is applying for a scholarship currently valued at $5000. If she is awarded it at the end of next year, how much is the scholarship worth in today’s dollars, assuming inflation of 3 percent?
Answer provided by our tutors
The reduced amount is computed using the standard present value formula:
Reduced amount = amount/(1 + inflation rate)^number years
5000 = amount/(1 + 0.03)^1
Let 'x' represent the amount:
x/(1 + 0.03) = 5000
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x = $5,150
The scholarship is worth $5,150 in today’s dollars.