Question

please solve question 5and 6 clearly

of the next 6 years the labor cost in then-current and constant wor 5. If you desire a real return of 8% on your money, excluding inflation, and inflation is running at 3%, what combined discount rate should you be seeking? (3.3) 6. Mellin Transformers Co. uses a required return of 15% in all alternative evaluations. Inflation is running at 5%. What real discount rate, exclusive of inflation, are they implicitly using? (3.3)

Answer 1

5)

Nominal discount rate = [ ( 1 + Real discount rate) $\times$ ( 1 + Inflation rate ) -1 ] $\times$ 100

Nominal discount rate is the combination of real return and inflation rate

Combined discount rate = [ (1 + 0.08 ) $\times$ ( 1 + 0.03) -1 ] $\times$ 100

Combined discount rate = 11.24%

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6)

Real discount rate = ((1+ nominal discount rate (1 + inflation rate - 11 x 100

1+0.15 Real discount rate = | 1 + 0.05 -11 X 100

Real discount rate = 9.52%