Restate the above net cash flows in real terms. Discount the restated cash flows
ID: 2766512 • Letter: R
Question
Restate the above net cash flows in real terms. Discount the restated cash flows at a real discount rate. Assume a 20% nominal rate and 10% expected inflation. NPV should be unchanged at +2,190, or $2,190,000. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest thousands of dollar.)
($ thousands) Period 0 1 2 3 4 5 6 7 Net cash flow –14,600 –1,684 3,147 6,523 10,734 10,185 5,957 3,469 Present value at 20% –14,600 –1,403 2,185 3,775 5,177 4,093 1,995 968 Net present value = 2,190 (sum of PV's)
Explanation / Answer
Answer to the Question
Computation of Real rate of return
We know that
(1 + nominal rate) = (1 + real interest rate) (1 + inflation rate).
=>(1+Real Interest rate)=(1+Nomial rate of return)/(I+Inflation rate
=> Real interest rate =((1.2/1.1)-1)*100
=>Real interest rate=9.09%
Year 0 1 2 3 4 5 6 7 Net Cash Flow (14,600) (1,684) 3,147 6,523 10,734 10,185 5,957 3,469 Discount Factor @ 9.09%(Real Interest Rate) 1.000 0.524 0.274 0.144 0.075 0.039 0.021 0.011 NET CASH FLOW (REAL) (14,600.00) (882.14) 863.54 937.63 808.24 401.73 123.08 37.55 NPV $ (12,310.38)
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