Calculating Present Value with Inflation-Linked Cash Flow: A Finance Question

[939]

Cash flow of 100 000. Interest rate = 8%, inflation = 3%. Cash flow will keep pace with any increase in prices. Find present value for first three years.

Answer:

Because it says "cash flow will keep pace with increase in prices", don't you not divide by the inflation rate, but instead multiply it by the principal?

Year 1:
100 000/(1.08)

Year 2:
(100 000*1.03)/(1.08^2)

Year 3:
(103 000*1.03)/(1.08^2)

 

[939]

Nevermind, got it: to anyone interested, what I did above was wrong, you just find the real interest rate and use the annuity formula.