Instructor-created question Question Help * In 2015, an investor has an endowmen

ID: 1152626 • Letter: I

Question

Instructor-created question Question Help * In 2015, an investor has an endowment which he plans to invest in a new ectory being set up. The new factory project gives a ted real income retum of $100 every year for the next 3 years. Assume that the investor ignores the indal investment to calcuiste the present value of his returns and the nominal discount rate is 20%. The price lcvds for ycars 2015 to 2019 are given in the table below Year Price Level (P) 1.03 1.08 1.17 The inflation rtefren year 2015to2016 is: The inflation ete frorn year 2015 to 201 7 is: The mflation rate from year 201 5 to 20lis ?% (use integer values} %(use integer values, D% (use ringer values) using the infilation rates above, find the real greeent value for the relurns from the new factory project (v: s present value for the returns from the new factory project (V Round your anwer lo two decimal pluces) The ecuation used for this celculation is

Explanation / Answer

Year

Price level

Inflation

2015

1.03

2016

1.08

4.85%

2017

1.12

3.70%

2018

1.17

4.46%

average

4.34%

The inflation rate from year 2015 to 2016 is 4.85%

The inflation rate from year 2016 to 2017 is 3.70%

The inflation rate from year 2017 to 2018 is 4.46%

The average inflation rate is 4.34%

The formula for inflation = (Price level 2016-Price level 2015)/Price level 2015

The real rate = nominal discount rate - average inflation rate = 20-4.34 = 15.66 percent

The present worth formula = 100*(P/A,15.66%,3)

(P/A,15.66%,3) = (((1+0.1566)^3)-1)/(0.1566*(1+0.1566)^3) = 2.2584

= 100*2.258 = 225.84