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Homework Help: Finance: find present value

  1. Feb 27, 2014 #1


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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.


    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)
  2. jcsd
  3. Feb 27, 2014 #2


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