Use of an inflation calculatorlike one from the Bureau of La

Use of an inflation calculator(like one from the Bureau of Labor Statistics at www.bls.gov.oco/home.htm) tells us that becasue of inflation, a car costing $20,000 in the year 2000 cost $25,320 in 2010. What was the average inflation rate per year over those ten years? What if the car cost $30,000 in 2000, how much would it have cost in 2010?

Do not use Excel for answer this question, please.

Solution

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

1.

25320=20000(1+r/100)^10

(25320/20000)^(1/10)=(1+r/100)

(1+r/100)=1.0239

r=(1.0239-1)*100

=2.39%(Approx).

b.

A=$30000(1+2.39/100)^10

=$30000*1.266

=$37980.