Homework Answers
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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