I really need help on this question for very practical reasons. A housing application is involved; I’ve tried to solve it myself, and I can’t do it. If you had a brain injury, you’d probably have trouble too. The math part never worked too well, and you know, I think it’s just gone once and for all…
Anyway, let’s say that ten years from now, you’ll get a lump sum of $235,000. Assuming that inflation is 4% a year (PLEASE, let’s just assume this), then what would the equivalent cash surrender value be now? How about a $470,000 lump sum in 20 years (again, because we need to assume something, and we have to come up with something reasonable, the same 4%.) Any help would be greatly appreciated…
The numbers given are correct, I assume, but note that what you want to use is not the rate of inflation, but the discount rate or interest rate. Using the rate of inflation here tells you the equivalent spending power of of the money at two different times. To get the cash surrender value, you need to know what completely safe (assuming that the cash amounts stated are completely safe) interest rate you could earn (or should assume according to the contract).
Wiki has a good entry on Time Value of Money calculations. Had to take a 400 level course on engineering economics that bored me to tears. Got sick and tired drawing charts like this.
If you have access to Excel, the formula is =PV(4%,20,0,470000). The 0 is because you aren’t making any payments. It makes it very easy to plug in different scenarios.
I just want to point out that in the OP the 4% was specified as the rate of inflation, not the rate of interest. In that case, $100 in 10 years is the same as $100 today. It won’t buy as much as $100 today, but it will still be $100.
