A loan of $100,000 is taken out which requires an annual interest payment of 6%

Question

A loan of $100,000 is taken out which requires an annual interest payment of 6% of the outstanding principal. If no principal payments are made over time and inflation is 3.1% per year, the payment at the end of year four is: A real dollar cash flow of $6,000 and an actual dollar cash flow of $5,310. An actual dollar cash flow of $6,000 and a real dollar cash flow of $5,310. An actual dollar cash flow of $6,779 and a real dollar cash flow of $6,000. A real dollar cash flow of $5,310 and an actual dollar cash flow of $6,779.

Explanation / Answer

C. Actual dollar cash flow of $6779 and real dolllar cash flow of $6000

Reason . Actual dollar outflow= real interest (1+ inflation rate)time

= 6000 × (1.031)4

=$6779

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