Question

3- If a small company invests $100,000 in a new project, how much must the compay receive each year to recover the investment in this project in 5 years? The real interest rate (i) is 5% per year and the inflation rate (f) is 3% per year.

Answer 1

Ans. Nominal interest rate = real interest rate + inflation rate = 5 + 3 = 8% or 0.08

Let the revenue received each year for 5 years is A

Using the formula for present value of the equivalent cashflows having present value $100000 at 8% interest rate,

100000 = A*[(1-1/(1+0.08)^5)/0.08)]

=> A = $25045.6455

Thus, a company must receive $25045.6455 each year to recover the investment amount.

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