Mr. Art Deco will be paid $260,000 one year hence. This is a nominal flow, which

Question

Mr. Art Deco will be paid $260,000 one year hence. This is a nominal flow, which he discounts at an 9% nominal discount rate:

260,000

Calculate the PV of Mr. Deco’s payment using the equivalent real cash flow and real discount rate. (You should get exactly the same answer as he did.) (Do not round intermediate calculations. Round your "Real cash flow" and "Present value" answers to the nearest dollar amount and "Real discount rate" answer to 2 decimal places.)

Mr. Art Deco will be paid $260,000 one year hence. This is a nominal flow, which he discounts at an 9% nominal discount rate:

Explanation / Answer

In ideal sense (1+nominal rate) = (1+real rate)*(1+ inflation rate)

1.09 = (1+ real rate)* 1.04

1.09 = 1.04 + 1.04 real rate

.05 = 1.04 real rate

real rate = 4.81%

Pv based on real rate = 263000 * (1/1.0481) = $ 250930.25

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