Question

Given the following information regarding cash flows and discount rates, answer the questions below.

Year	0	1	2	3	4
Nominal Cash Flow	-15,000	5,000	7,500	3,500	1,000
Inflation	0%	2%	1.75%	1.5%	1.25%
Real Rate	0%	4%	4.5%	5%	5.5%

a) What are the nominal rates for each year?

b) What are the discount rates for each year?

c) What is the NPV of the project?

Answer 1

	N	Year	0	1	2	3	4
	A	Nominal Cash Flow	-15,000	5,000	7,500	3,500	1,000
	B	Inflation	0%	2%	1.75%	1.50%	1.25%
	C	Real Rate	0%	4%	4.50%	5%	5.50%
	D=B+C	Nominal Rate	0.00%	6.08%	6.33%	6.58%	6.82%
		Calculation of Nominal Rate	((1+0)*(1+0))-1	(1.02*1.04)-1	(1.0175*1.045)-1	(1.015*1.05)-1	(1.025*1.055)-1
		Discount Rate	0.00%	6.08%	6.33%	6.58%	6.82%
		Present Value of Year 4 Cash Flow in year3	936	(1000/1.0682)
		Year 3 Cash Flow	3,500
		Value of Cash Flow at end of Year3	4436	(936+3500)
		Present Value Cash Flow in year2	4162	(4436/1.0658)
		Year2 Cash Flow	7500
		Value of Cash Flow at end of Year2	11662	(4162+7500)
		Present Value Cash Flow in year1	10968.002	(11662/1.0633)
		Year1 Cash Flow	5,000
		Value of Cash Flow at end of Year1	15,968	(10968+5000)
		Present Value Cash Flow in year0	14951	(15968/1.068)
		Year0 Cash Flow	-15,000
		Net Present Value(NPV)	-49	(14951-15000)