If inflation runs at 5% per annum over four years, to keep pace with inflation, what must an investment of €25,000 grow to?

Prepare for the QFA Life Assurance Test. Study with flashcards and multiple-choice questions, each with hints and explanations. Get ready for your exam success!

To determine how much an investment of €25,000 must grow to in order to keep pace with 5% annual inflation over a period of four years, we can utilize the formula for the future value of money adjusted for inflation.

The formula to calculate the future value considering inflation is given by:

Future Value = Present Value × (1 + inflation rate)^number of years

Here, the present value is €25,000, the inflation rate is 5% (or 0.05), and the number of years is 4.

Plugging these values into the formula:

Future Value = €25,000 × (1 + 0.05)^4

Future Value = €25,000 × (1.21550625) (since (1.05)^4 ≈ 1.21550625)

Future Value = €30,387.66

Rounding this to the nearest 100 gives approximately €30,400.

Therefore, for the investment of €25,000 to maintain its purchasing power in light of 5% annual inflation over four years, it needs to grow to about €30,400. This accurately reflects the correct answer to the question, which effectively accounts for the cumulative