Question

"Consider the following cash flow in actual dollars. The inflation rate is 3.4%. The inflation-free interest rate is 11.4%. What is the net present worth of the cash flow?
The cash flow in actual dollars for year 0 through 3 is -$56, $17, $17, and $30 respectively."

Answer 1

   I = 11.4%      (interest rare without inflation)

          f = 3.4%        (inflation rate)

          i = ?             (rate of return)

   I = i + f + ( i * f)

0.114 = i + 0.034 + 0.034i

i + 0.034i = 0.114 - 0.034 = 0.08

i(1 + 0.034) = 0.08

1.034i = 0.08

i = 0.08 / 1.034

= 0.077      or 7.7%

PW = -56 + 17(P/A, 7.7%, 3) + (30 -17)(P/F, 7.7%, 3)

       = -56 + 17(2.5911) + 13(0.8005)

       = -56 + 44.09 + 10.41

       = -1.5