The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the real cash flow for year 3?
A) $13,916.82
B) $11,488.63
C) $10,998.66
D) $10,242.15
E) $14,944.75

Question

Quizplus · Accepted Answer

To find the real cash flow for year 3, we need to adjust the nominal cash flow ($12,372) for inflation to see what its value would be in today's dollars. The formula to adjust for inflation is: Real Cash Flow = Nominal Cash Flow / (1 + inflation rate)^number of years. Here, the inflation rate is 2.5% or 0.025 as a decimal, and the number of years is 3. So, the calculation is $12,372 / (1 + 0.025)^3 = $12,372 / 1.077 = $11,488.63.

The Cash Flow in Dollars Received in Year 3 Is