Question

You are buying a sofa. You will pay $200 today and make three consecutive annual payments of $300 in the future. The real rate of return is 10.5 percent, and the expected inflation rate is 4 percent. What is the actual price of the sofa? (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.)

Answer 1

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

0.105=((1+Nominal return)/(1+0.04)-1)*100

Nominal return = 14.92

Sofa
Discount rate	14.920%
Year	0	1	2	3
Cash flow stream	-200	-300	-300	-300
Discounting factor	1.000	1.149	1.321	1.518
Discounted cash flows project	-200.000	-261.051	-227.159	-197.667
price= Sum of discounted cash flows
price of Sofa =	885.88
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor