Question

An investment of $8,000 is made at time 0 with returns of $3,500 at the end of each of years 1 through 4, with all monetary amounts being in real dollars. Inflation is running 7% per year over that time. Also, the real TVOM is 15% per year. Determine the investment’s present worth using both real dollars and then-current dollars.

Present Worth, real dollars: $enter a dollar amount  
Present Worth, then-current dollars: $enter a dollar amount  

Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±5.

Answer 1

Given data

Investment = P = $8000

Annual returns = A = $3500

Inflation = I = 7%

Interest rate = i = 15%

To Find

1. Present worth in real dollars [considering inflation] =?

2. Present worth in then-current dollars [Without considering inflation] =?

We have

Present worth (PW) = Present worth of benefits - Present worth of costs

1. Present worth in real dollars [considering inflation]

Here the Interest rate = Interest rate – Inflation rate = 15% - 7% = 8%

PW = 3500(P/A,8%,4) – 8000

Using DCIF Tables

PW = 3500(3.312) – 8000

PW = $3592

2. Present worth in then-current dollars [Without considering inflation]

Here the Interest rate = 15%

PW = 3500(P/A,15%,4) – 8000

Using DCIF Tables

PW = 3500(2.855) – 8000

PW = $1992.5