Question

You will receive $5,000 a year in real terms for the next 5 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 9.625 percent and the inflation rate is 2.3 percent. What are your winnings worth today in real dollars?

Answer 1

Answer:

$20,413

Explanation:

The computation of real dollars is given below:-

= [(1 + nominal rate) ÷ (1 + inflation rate)] - 1

= [(1 + 0.09625) ÷ (1 + 0.023)] - 1

= 1.071603 - 1

= 0.071603

= 7.1603%

So, the Present value

= Annuity × [1 - 1 ÷ (1 + rate of interest)number of years] ÷ rate of interest

= 5,000 × [1 - 1 ÷ (1 + 0.071603)5] ÷ 0.071603

= 5,000 × 4.082659

= $20,413