Question

Restate the above net cash flow 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 +2,593, or $2,593,000.

($ thousands) Period 1 - 14,100 -1,634 3.097 - 14,100 -1,362 2.151 2,593 (sum of PVS) Net cash flow Present value at 20% Net present value 3 6,473 3.746 4 10.684 5,152 5 10,135 4,073 6 5.907 1,978 7 3.419 954 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 +2,593, or $2.593,000 (Negative answers should be indicated by a minus sign. Do not round Intermediate calculations. Enter your answers in thousands rounded to the nearest whole number.) Year o car 0 Year 1 Year 2 Year 3 Year 3 Year 4 Year 4 Year 5 ve Year 7 Net cash flows (real) Net present value References eBook & Resources

Answer 1

solution: 9.09091% Real interest rate = ((1+nominal rate)/(1+inflation rate))-1 ((1+0.2)/(1+0.1))-1 0 1 2 3 4 5 6 7 -14100 -1634 3097 6473 10684 10135 5907 3419 1.00000 1.10000 1.21000 1.33100 1.46410 1.61051 1.77156 1.94872 -14100 -1485 2560 4863 72976293 3334 1754 1.00000 0.91667 0.84028 0.77025 0.70607 0.64723 0.59329 0.54385 -14100 -1362 2151 3746 5152 4073 1978 954 2593 net cash flow (nominal) / (1+inflation rate)an net cash flow (real) x PV factor at 9.09091% net present value NPV (sum of PV) -1485 25603100 1.464107 1.00000