Homework Answers
Real interest rate = (market rate - inflation) /(1+inflation)
= (0.16-0.04) /(1+0.04)
= 0.1153846
Present value of payments = 1000*(P/A,16%,4) = 1000 * 2.798181 = 2798.18
Constant dollar payment series = 2798.18 * (A/P,11.53846%,4)
= 2798.18 * 0.1153846 * ((1 + 0.1153846 )^4)/((1 + 0.1153846 )^4-1)
= 2798.18 * 0.1153846 * ((1.1153846 )^4)/((1.1153846 )^4-1)
= 2798.18 * 0.326040
= 912.31 ~ 912
option A is correct answer
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