IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Allowing for inflation
A salary of Rs 8,00,000 a year today must keep its purchasing power. If prices rise by 6% per year, what salary is needed in 5 years to have the same purchasing power as today, to the nearest rupee?
The salary needed is about Rs 10,70,581. Prices compound at 6% for five years, so multiply Rs 8,00,000 by 1.06 to the power 5, which is 1.338226. Using simple inflation of 30% would understate the figure at Rs 10,40,000.
- ARs 10,40,000
- BRs 10,70,581Correct
- CRs 10,58,000
- DRs 11,20,000
- Rs 10,00,000
Explanation
Required salary = 8,00,000 x 1.06^5 = 8,00,000 x 1.338226 = 10,70,581. Adding 6% simple for five years gives 10,40,000, ignoring compounding.
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