The following information applies to the questons dsplayed below The state\'s se

Question

The following information applies to the questons dsplayed below The state's secretary of education is considering the purchase of a new computer for $76,000. A cost study Indicates that the new computer should save the Department of Education $38,000, measured in real doller during each of the next eight years. The real interest rate Is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes. Use Appendix A for your reference. (Use appropriate factoris) from the tables provided) 18 1000 points value: Re pysepdre a schedule of cash Rows measured in real dlars Incuhe 1. Prepare a schedule of cash flows measured in real dollars, Include the initial acquisition and the cost quition and the cost savings for each of the next eight years. (Round "Discount Factor" to 3 decimal places. Negative amounts should be indicated by a minus sign.) Discount Year in RealFactor (real Present Value interest Dollarsrate 20) 1000 0.833 0 694 0 579 0 482 0.402 0.335 0.279 0 233 (76,000) 31,654 26,372 22,002 18,316 15,276 12.730 10.602 8,854 S (76,000) 38,000 38,000 38 000 38,000 38,000 38,000 38,000 38,000

Explanation / Answer

1.

        69,768

2. Nominal Rate = 1.2x.10

                           =1.32

Year CF in Real Dollar Price Index CF in Nominal Dollar DF in Nominal PV
0                          -76,000                              1.000                         -76,000                1.000        -76,000
1                           38,000                              1.100                          41,800                0.758         31,684
2                           38,000                              1.210                          45,980                0.574         26,393
3                           38,000                              1.331                          50,578                0.435         22,001
4                           38,000                              1.464                          55,636                0.329         18,304
5                           38,000                              1.611                          61,199                0.250         15,300
6                           38,000                              1.772                          67,319                0.189         12,723
7                           38,000                              1.949                          74,051                0.143         10,589
8                           38,000                              2.144                          81,456                0.108            8,797
NPV         69,792

1.32

Year CF in Real Dollar DF PV 0 -76000 1        -76,000 1 38000 0.833          31,654 2 38000 0.694          26,372 3 38000 0.578          21,964 4 38000 0.482          18,316 5 38000 0.402          15,276 6 38000 0.335          12,730 7 38000 0.279          10,602 8 38000 0.233            8,854 NPV

        69,768

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