Question

You are paying a series of five constant-dollar (or real-dollar) uniform payments of $2,037.73 beginning at the end of first year. Assume that the general inflation rate is 25.46% and the market interest rate is 25.46% during this inflationary period

Answer 1

$10,188.65

Step-by-step explanation:

First, we have to calculate the real rate of interest from the given information.

1 + real interest rate = 1 + market interst rate / 1 + inflation rate

=
`(1 + market interst rate)/(1 + inflation rate)`

real interest rate =
`( 1 + 0.2546)/(1 + 0.2546 ) - 1`

real interest rate = 1 -1

real interest rate = 0%

Since the real interest rate is 0%, the net present worth of the project is

= $2,037.73 + $2,037.73 + $2,037.73 + $2,037.73 + $2,037.73

= $2,037.73 x 5

= $10,188.65