Question

1. Assume per visitors benefits will accrue in increments of RM 100 at the end of each of the next TWO years.

Find the present value of benefits (PVB) in nominal terms for each VISITOR, assuming an annual inflation rate of 5% and a nominal annual discount rate of 10%.

2. Assume per visitors benefits will accrue in increments of RM 100 at the end of each of the next TWO years.

Find the present value of benefits (PVB) in real terms for each VISITORS, assuming an annual inflation rate of 5% and a nominal annual discount rate of 10%.

Answer 1

1. The cashflow can be given as

End of Year 1: RM 100

End of Year 2: RM 200

PV at discount rate of 10% = 100/1.10^1 + 200/1.10^2 = RM 256.20

So the present value of benefits per visitor will be RM 256.20 in nominal terms.

2. When we are doing the calculations in real terms, we need to factor in inflation.

So Nominal Discount Rate = (1 + Real Discount Rate) * (1 + Inflation Rate) – 1

or 10% = (1 + Real Discount Rate) * (1+5%) - 1

or 0.1 + 1 = (1 + Real Discount Rate) * 1.05

or (1 + Real Discount Rate) = 1.0476

or Real Discount Rate = 0.0476 = 4.76%

PV at discount rate of 4.76% = 100/1.0476^1 + 200/1.0476^2 = RM 277.69

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