Questions 61 to 66 Your municipality is planning the construction of a new sport

Question

Questions 61 to 66 Your municipality is planning the construction of a new sports complex on January 1, 2018 (Yes construction is almost instantaneous!!) You've requested by the municipal council to explain the relationship between the project actual and constant dollar flows for the project. The projected annual inflation rate is 3% The nominal (with inflation) interest rate is 5%. Actual cash flows are fully sensitive to inflation (i.e., they increase at the same rate as inflation) * * Projected Cash Flows Cash Flows in January 1, 2018 dollars Cash Flows in Actual Dollars Initial Investment on January 1, 2018 50,000 EOY 2018 2019 2020 2021 2022 20,000

Explanation / Answer

61.Precise real MARR={(1+nominal Interest rate)/(1+inflation rate)}-1

={(1+0.05)/(1+0.03)}-1

=(1.05/1.03)-1=1.0194-1=1.94%

62. Approximate real MARR=Nominal rate of interest-inflation rate=5%-3%=2%

63.Dollar value of AA is the constant dollar rate wherein the effect of inflation has to be removed, thus AA=50000*P/F(Inflation rate,1)

64.=20,000(F/P 3%,2)=20000*(1+.03)^2

=21212=21200

65) 20000(F/P, inflation rate,3)

66) 20000(F/P, inflation rate,4)=20000*(1.03)^4=1.1255*20000=22510=22500

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.