Question
Caffieneland is a small country in Central America. The main product of the country is coffee, which is currently priced at $1.20 per cup. Inflation
Caffieneland is a small country in Central America. The main product of the country is coffee, which is currently priced at $1.20 per cup. Inflation is expected to be 3% per year, and the nominal interest rate is 10% per year.
c. Juan Valdez, a brilliant local scientist, has invented a coffee replicator. The replicator works as follows: At time 0, you insert 1,000 cups of coffee. These cups are consumed by the machine, that is you have to invest 1,000 cups now to make the replicator operate. Then, for each of the next five years, the replicator produces 300 cups of coffee. You get 300 cups at time 1, another 300 cups at time 2, and so on. After five years the replicator is used up. Calculate the PV of the replicator in terms of dollars.
d. Now calculate the PV of the replicator in terms of coffee. Hint: Use cups of coffee as your currency. Make a Coffee-Flow diagram and then calculate the PV. Be sure to use the coffee interest rate in your PV calculations.
PLEASE SHOW ALL CALCULATION.
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