Question

($ thousands)
Period
	0	1	2	3	4	5	6	7
Net cash flow	–12,900	–1,514	2,977	6,353	10,564	10,015	5,787	3,299
Present value at 21%	–12,900	–1,251	2,033	3,586	4,928	3,861	1,844	869
Net present value =	2,970	(sum of PVs)

   

Restate the above net cash flows in real terms. Discount the restated cash flows at a real discount rate. Assume a 21% nominal rate and 9% expected inflation. NPV should be unchanged at +2,970, or $2,970,000. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in thousands rounded to the nearest whole number.)

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Net cash flows (real)
Net present value	$

Answer 1

Nominal Rate = 21%
Inflation Rate = 9%

Real Rate of Return = (Nominal Rate - Inflation Rate) / (1 + Inflation Rate)
Real Rate of Return = (0.21 - 0.09) / (1 + 0.09)
Real Rate of Return = 0.1101 or 11.01%

Note:

Real Net Cash Flow = Nominal Net Cash Flow / (1 + Inflation Rate)^Period
Present Value at 11.01% = Real Net Cash Flow / (1 + 0.1101)^Period