Wed 29 Apr, 2020 02:56 pm

Hello all, I would like some help with a fairly basic "value of money" question. (I'm a beginner in this field so please bear with me.)

For a paper, I'm writing about income changes throughout a decade (2010-2019). And I would like to convert a bunch of random incomes (amounts) from different years to their "2020" value.

I found the formula for the present and future value calculations. My problem is that I do not know what to put in place of the "r" and if I'm using the right formula.

Suppose that I have an amount of $3000, and this amount is an income in the year 2011. Now do I understand it correctly that I need to use the FV formula if I want to know its value for the current year (2020)?

So it would look something like: FV = 3000 x (1+r1) x (1+r2) ... x (1+r9), right? (9 because 2020-2011 = 9, that's why I wrote 9, correct me if I'm wrong please)

Similarly, with another example, would $5000 from 2019 look like this for 2020: FV = 5000 x (1+r1) ? So just one r.

But what exactly is r? Is it simply the inflation for each year? Do I just take the inflation rate of my country in each year from 2011 to 2019 and use it as r1, r2, r3 etc.? Or what do I put in the place of r?

(Another thing I'm not sure about: does it make any difference if I use monthly or yearly wages? I'm thinking it wouldn't, since they are just amounts either way, so with monthly, I would get a result of a monthly payment's value in 2020 instead of a yearly?)

OR do I have to do something entirely different to get the results I need?

Thanks in advance, any help is very much appreciated!!

@Vermilion111,

Yes, the r values are inflation rates and it doesn't matter if you use monthly or annual wages.

@engineer,

Thank you! And for r1 do I start with the inflation rate of 2011 or 2012? If I'd like to see the value of a 2011 lump sum for 2020, then r1 should be the inflation rate of 2012?

@Vermilion111,

2011 dollars x (1 + R2011) = 2012 dollars.

2012 dollars x (1 + R2012) = 2013 dollars.

2011 dollars x (1 + R2011)(1 + R2012)...(1 + R20xx) = 20xx dolllars.

@engineer,

In the in the last line, shouldn't the last R be R20xx-1 then? Do I need the last one to be R2020 for the current year's value and not R2019?

Because in "2012 dollars = 2011 dollars x (1 + R2011)" there is no (1 + R2012), that's why I'm asking, sorry for the confusion

Thanks