Question

Given the following information regarding cash flows and discount rates, answer the questions below.

Year	0	1	2	3	4
Nominal Cash Flow	-11,000	4,000	5,000	6,000	1,000
Real Rate	0%	6%	5%	4%	5%
Inflation Rate	0%	3.5%	3%	2.5%	2.5%

a) What are the nominal rates for each year?

b) What is the NPV of the project?

Answer 1

Real interest rate = Nominal Interest rate - inflation rate

a) Nominal interest rate = Real interest rate + Inflation rate

Year	Real interest rate	Inflation rate	Nominal Interest rate
0	0	0	0
1	6	3.5	9.5
2	5	3	8
3	4	2.5	6.5
4	5	2.5	7.5

b) NPV of the project

Year	Real interest rate	Nominal cash flow	Discounting factor	NPV
0	0	-11000	1	-11000
1	6	4000	0.94339623	3773.5849
2	5	5000	0.90702948	4535.1474
3	4	6000	0.88899636	5333.9782
4	5	1000	0.82270247	822.70247
Total NPV				3465.4129

Therefore NPV of the project = 3465.4129