Certified Financial Planner (CFP) Practice Exam

To determine how much Charles Cornwall needs to invest today to fund a $30,000 income stream for 12 years, considering a 7% return and 5% inflation, we need to adjust the $30,000 for inflation to find its present value. First, we calculate the inflation-adjusted income stream. Since the annual income required is $30,000 with a 5% inflation rate over 12 years, the future value of this amount increases each year. However, since this is a fixed nominal amount, it can be treated as a consistent withdrawal adjusted for inflation when calculating present value. To find the present value of the income stream in today’s dollars, we can use the formula for the present value of an annuity. The formula is as follows: PV = PMT * [(1 - (1 + r)^-n) / r] where: - PV is the present value, - PMT is the payment amount ($30,000), - r is the real interest rate (which is adjusted based on the nominal rate and the inflation rate), and - n is the number of years. The real interest rate can be calculated using the Fisher equation: (1 + nominal interest rate) = (1 +