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PROBLEM A $10,000 investment would return a series of $3,000 year-end payments over the next 5 years if no inflation were pre
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Answer #1

Calculation of discount rate,

  • In case there is an inflation the rate of discount to be used is (1 + discount rate) x (1 + inflation rate) = ((1 + 0.13) x (1 + 0.06)) - 1= 1.1978 - 1
  • Therefore the rate of discount is 19.78%.

Calculation of NPV,

  • Year Flow Present value Calculation
    1 3,000 2,504.6 3,000/(1+0.1978)1
    2 3,000 2,091 3,000/(1+0.1978)2
    3 3,000 1,745.7 3,000/(1+0.1978)3
    4 3,000 1,457.42 3,000/(1+0.1978)4
    5 3,000 1,216.75 3,000/(1+0.1978)5

    Therefore the present equivalent worth of the investment is 9015.47, (2504.6 + 2091 + 1745.7 + 1457.42 + 1216.75)

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