Question

You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 9.897 percent and the inflation rate is 2.9 percent. What is the present value of these payments in real dollars?

Answer 1

(1+nominal interest rate) = (1+ real interest rate) * (1+inflation rate)

=>

real interest rate = (1+9.897%)/(1+2.9%) - 1

= 6.80%

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

=>

Present value of investment

= 8000/1.068 + 8000/1.068^2 + 8000/1.068^3

= 21071.48