An engineer who is now 65 years old began planning for retirement 40 years ago. At that time, he thought that if he had $1 million when he retired, he would have more than enough money to live his remaining life in luxury. Assume the inflation rate over the 40-year time period averaged a constant 4.1% per year. a) What is the CV purchasing power of his $1 million at age 65

The CV purchasing power of his $1,000,000 at age 65 is $200,433.74

Explanation:

The constant-value (CV) purchasing power of the $1 million is calculated using the following formula:

Current dollars = Future dollars / (1 + f) ^n where

f = average inflation rate = 4.1% per year = 0.041

n = time period = 40 years

Future dollars = $1,000,000

Substituting these values in the above formula:

Current dollars = $1,000,000 / (1 + 0.041) ^40

= $1,000,000 / 4.989

= $200,433.74

Hence, the CV purchasing power of his $1,000,000 at age 65 is $200,433.74.