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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)
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)