You are the finance manager for Olympia Industries. The company plans to purchase $1,000,000 in new assembly line machinery in 5 years. How much must be set aside now at 6% interest compounded semiannually to accumulate the $1,000,000 in 5 years? If the inflation rate on this type of equipment is 4% per year, what will be the cost of the equipment in 5 years, adjusted for inflation? Use the inflation-adjusted cost of the equipment to calculate how much must be set aside now. Use the present value formula to calculate how much would be required now if you found a bank that offered 6% interest compounded daily.
My main question is how do you factor inflation into the equation? Is there a specific formula?