Question

Calculate the present value of a ton of steel using the following information:

money rate of interest is 7% per year
expected rate of general price inflation is 3% per year
expected rate of increase in the price of steel is 4% per year
current price of steel is $50 per ton.
1. Using the money rate of interest the present value of a ton of steel is __________.
2. Using the real rate of interest the present value of a ton of steel is __________.

Answer 1

The present value of a ton of steel can be calculated using the money rate of interest and the real rate of interest. Using the given rates, the present value is $46.73 per ton using the money rate of interest and $48.08 per ton using the real rate of interest.

Step-by-step explanation:

To calculate the present value of a ton of steel, we need to use the concept of present value and take into consideration the different interest rates and expected inflation rates. Using the money rate of interest of 7%, we can calculate the present value by discounting the future price of steel at a 7% rate. Similarly, using the real rate of interest of 4% (7% - 3% inflation rate), we can calculate the present value by discounting the future price of steel at a 4% rate.

1. Using the money rate of interest:

Present Value = Future Price / (1 + Interest Rate)
= $50 / (1 + 7%)
= $46.73 per ton

2. Using the real rate of interest:

Present Value = Future Price / (1 + Interest Rate)
= $50 / (1 + 4%)
= $48.08 per ton