Question

PRINTER VERSION BACK Problem 11.16 You are buying a sofa. You will pay $200 today and make three consecutive annual payments of $300 in the future. The real rate of return is 12.0 percent, and the expected inflation rate is 4 percent. What is the actual price of the sofa? (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.) Actual prices

Answer 1

Real rate of return = 1+nominal rate of return / 1+ inflation rate - 1

Real rate of return = 12% and inflation rate = 4%

0.12= 1+ nominal rate of return /1.04 -1

Nominal rate of return +1 /1.04= 0.12+1

Nominal rate of return = 1.12 × 1.04 -1= 16.48%

Price of sofa =current payment+ future payment / (1+NRR)^1 + future payment /(1+NRR)^ 2 + future payment /(1+NRR)^3

Price of sofa = 200+300/(1+.1648) + 300/(1+.1648)^2 + 300/(1.1648)^3

Price of sofa= 200+ 257. 555+ 221.115 +189.831= 868.50