The states Secretary of Education is considering the purchase of a new computer for $100,000. A cost study indicates that the new computer should save the Department of Education $30,000, measured in real dollars, during each of the next eight years. The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes.

Use Appendix A for your reference.

Required:

1. Compute the nominal interest rate.

2. Prepare a schedule of cash flows measured in nominal dollars. Use a nominal discount rate equal to the nominal interest rate.

3. Using cash flows measured in nominal dollars, compute the net present value of the proposed computer. Use a nominal discount rate equal to the nominal interest rate.

Future Value and Present Value Tables 121 Futre ot a Srle d 4702727075002 778 Table I 1 11 Pret Ve erk RS Cash Flow in Nominal Dollars Year Cash Flow in Price Index Real Dollars Discount Present Value Factor 2 3 4 8 Y