Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he
Question:
Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at an 8% nominal discount rate:
PV = 100,000/1.08 = 5 $92,593
The inflation rate is 4%.
Calculate the PV of Mr. Deco’s payment using the equivalent real cash flow and real discount rate. (You should get exactly the same answer as he did.)
Step by Step Answer:
Real cash flow 1000...View the full answer
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
Related Video
The present value of future cash flows is calculated to determine the value today of a stream of future cash flows. It is calculated by discounting the future cash flows to their present value using a discount rate. The discount rate reflects the time value of money and the risk of the cash flows. It is important because it helps in making investment decisions, capital budgeting, loan decision making, and financial planning. By discounting future cash flows to their present value using a discount rate, it takes into account the time value of money and the risk associated with the cash flows. This allows investors, lenders, and financial planners to evaluate the viability of potential investments, projects, or loan applications, and to estimate the future value of investments or savings. calculating the present value of future cash flows is important in making investment decisions, capital budgeting, loan decision making, and financial planning. It helps to determine the viability of long-term projects, evaluate loan applications, and estimate the future value of investments or savings.
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