Question

You are buying a sofa. You will pay $200 today and make three consecutive annual payments of $300 in the future. The real rate of return is 16.5 percent, and the expected inflation rate is 4 percent. What is the actual price of the sofa? (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.)

Actual price $

Answer 1

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

0.165=((1+Nominal return)/(1+0.04)-1)*100

Nominal return = 21.16

Sofa
Discount rate	0.2116
Year	0	1	2	3
Cash flow stream	-200	300	300	300
Discounting factor	1	1.2116	1.467975	1.778598
Discounted cash flows project	-200	247.6065	204.3632	168.6722
Price= Sum of discounted cash flows
Price Sofa =	420.64
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor