Question

Impact of inflation on investments   Personal Finance Problem  You are interested in an investment project that costs $40,000 initially. The investment has a 5​-year horizon and promises future​ end-of-year cash inflows of $12,000​, $12,500​, $11,500​, $9,000​, $8,500​, respectively. Your current opportunity cost is 6.50% per year.​ However, the Fed has stated that inflation may rise by 1.5% or may fall by the same amount over the next 5 years. Assume a direct positive impact of inflation on the prevailing rates​ (Fisher effect) and answer the following​ questions: (Assume that inflation has an impact on the opportunity​ cost, but that cash flows are contractually fixed and are not affected by​ inflation.) a. What is the net present value​ (NPV) of the investment under the current required rate of​ return? b. What is the net present value​ (NPV) of the investment under a period of rising​ inflation? c. What is the net present value​ (NPV) of the investment under a period of falling​ inflation? d. From your answers in ​(a​), ​(b​), and ​(c​), what relationship do you see emerge between changes in inflation and asset​ valuation? a. The net present value of the investment under the current required rate of return is ​$ nothing . ​(Round to the nearest​ cent.)

Answer 1