Given the following information regarding cash flows and discount rates, answer the questions below. Year 0...

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Question

Given the following information regarding cash flows and discount rates, answer the questions below. Year 0...

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?

business finance

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Answer 1

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

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Answer 2

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