Reuben would like to buy a sports car that costs $25,000 today when he graduates from college in 5 years. If the rate of inflation is expected to be 3% per year over the next 5 years, how much would Reuben expect to pay for a similar sports car in today's dollars?

$28,982

Explanation:

Reuben would like to buy a sports car that costs $25,000 today when he graduates from college in 5 years.

If the rate of inflation is expected to be 3% per year over the next 5 years, then Reuben should expect to pay for a similar sports car in today's dollars to the tune of:

Future Value = Present Value x (1+r) ^ n

where r = inflation rate

n = number of years

Therefore Future values = 25,000 x (1.03) ^ 5 = $28,982

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