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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.

    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)
     
  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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