Question

You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars?
A) $18,529
B)$21,705
C)$20,720
D) S20,447
E) $18,811

Answer 1

Answer:

Explanation:

given data

pay = $8,000

solution

we will apply here Fischer Equation that is

1+Nominal Interest Rate = ( 1 + Real Interest Rate ) × ( 1 + Inflation rate )

put here value

1 + 8.46% = ( 1 + r ) × ( 1 + 3.1% )    

r = 5.20%

so here present value for year 1 = $\frac{8000}{1+0.052}$

present value for year 1 = $7604.56

present value for year 2 = $\frac{8000}{(1+0.052)^2}$

present value for year 2 = $7228.67

present value for year 3 = $\frac{8000}{(1+0.052)^3}$

present value for year 3 = $6871.36

so net present value is  7604.56 + 7228.67  + 6871.36

net present value is $21,705

correct option is B)$21,705