Question

Consider the following project's after-tax cash flow and the expected annual general inflation rate during the project period. End of Year General Inflation Rate Expected Cash Flow (in Actual S) -S54,000 $44,000 $44,000 $44,000 3.8% 4.4 5.9 (a) Determine the average annual general inflation rate over the project period. The average annual general inflation rate is 4.71 % (Round to two decimal places.) (b) Convert the cash flows in actual dollars into equivalent constant dollars with the base year 0. The equivalent cash flow in constant dollars at the end of year 0 is S - 54000. (Round to the nearest dollar) The equivalent cash flow in constant dollars at the end of year 1 is $42389. (Round to the nearest dollar.) The equivalent cash flow in constant dollars at the end of year 2 is $ (Round to the nearest dollar.)

Answer 1

a)

3.8% + 4.4% + 5.9% Average general inflation rate = ? = 4.70%

Average general inflation rate = 4.70%

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b)

The base year is 0 and inflation rate in base year is 0 .

Equivalent cash in constant dollars at end of year 0 is $ -54000

Equivalent cash flow in constant dollars at the end of year 1 is $ 44,000 $\times$ (1 + 0.038)^-1

Equivalent cash flow in constant dollars at the end of year 1 is $ 42389

Equivalent cash flow in constant dollars at the end of year 2 is $ 44,000 $\times$ (1 + 0.044)^-2

Equivalent cash flow in constant dollars at the end of year 2 is $ 40369