Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which

Question

Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at an 8% nominal discount rate:

100,000

Calculate the PV of Mr. Deco’s payment using the equivalent real cash flow and real discount rate. (You should get exactly the same answer as he did.) (Do not round intermediate calculations. Round your "Real cash flow" and "Present value" answers to the nearest dollar amount and "Real discount rate" answer to 2 decimal places.)

Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at an 8% nominal discount rate:

Explanation / Answer

Answer:

The relation between real rate, Nominal rate and Inflation rate is:

(1+Nominal Rate) = (1+Real Rate)(1+Inflation Rate)

=> (1+0.08) = (1+Real Rate)(1+0.04) => Real Rate = (1.08/1.04)-1 = 3.84615385%

So the Real Cashflow = Nominal Cashflow/(1+Inflation Rate) = $100,000/1.04 = $96,136

Now the Present value of the real cashflow, discounted at Real rate:

= Real cashflow/(1+Real Rate) = $96.136/1.0384615385 = $92,593 (ans)

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.