Siphiwe wants to take the effect of inflation into account. He decides to use his monthly living expenses, which are R2 500, to do this. He assumes that inflation will be a constant 5% for the forty years he invests.
(a) How many months’ expenses can he pay for using the R10 000 gift at his current age of 20 years?
(b) Use the inflation rate to calculate his expected monthly expenses in 40 years’ time when he turns 60.
(c) How many months’ expenses will be covered by his accumulated investment in 50 years’ time?
(d) He comes to the following conclusion: ‘The investment interest rate of 17\% increases the amount of money but the inflation rate decreases the value of the money’. Do you agree with his conclusion? Do you think it is important to take inflation into account when planning for long-term investments?
(e) How reliable is his assumption about the inflation rate value? Explain briefly.