Cindy Arella\'s godmother just left her an inheritance of $100,000: Cindy will r

Question

Cindy Arella's godmother just left her an inheritance of $100,000: Cindy will receive a payment of $100,000 when she turns 21, which will be in 8 years. Here is a diagram 4 5 6 7 8 Nominal Cash $100,000 Flow The nominal interest rate is 4% per year, and the inflation rate is expected to be 1% per year a. Calculate the present value of Cindy's inheritance using nominal cash flows b. Draw a diagram of the real cash flow corresponding to Cindy's inheritance. c. Calculate the present value of Cindy's inheritance using real cash flows

Explanation / Answer

ANSWER:

Real rate = [ ( 1+NR ) / ( 1 + IR ) ] - 1

[ ( 1+0.04 ) / ( 1 + 0.01 ) ] - 1

= [ 1.04 / 1.01 ] - 1

= 0.0297 i.e 2.97%

PV of Cash Flow = CF * PVF ( r%, n)

PV of cash flow using NR = $ 10,000 * PVF ( 4%, 8)

= $ 10000 * 0.7307

= $ 7307

PV of cash flow using RR = $ 10,000 * PVF ( 2.97%, 8)

= $ 10000 * 0.7913

= $ 7913

Please comment if you have any doubt

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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