Question

Please use Excel formulas

Question 4: Given the following information regarding cash flows and discount rates, answer the questions below. Year 2 3 4 Nominal Cash Flow 7,500.00 1,000.00 -15,000.00 5,000.00 3,500.00 Inflation 1.50% 1.75% 0.00% 2.00% 1.25% Real rate 5.00% 5.50% 0.00% 4.00% 4.50% What are the nominal rates for each year? (5) a) What are the discount rates for each year? (5) c) What is the NPV of the project? (5) b)

Answer 1

a)

Nominal rates

Year 1 = Real rate + Inflation = 2% + 4% = 6%

Year 2 = 4.5% + 1.75% = 6.25%

Year 3 = 5% + 1.5% = 6.5%

Year 4 = 5.5% + 1.25% = 6.75%

b)

Discount rates for each year is the nominal rate for each year.

c)

NPV of the project = -15000 + 5000/(1.06) + 7500/(1.0625)^2 + 3500/(1.065)^3 + 1000/(1.0675)^4 = $ 28.12

Note : There is no specific excel formula as the discount rates for each year is different and NPV formula cannot be used.