You purchased an investment which will pay you $8,000,in real dollars,a year for the next three years.Each payment will be received at the end of the period with the first payment occurring one year from today.The nominal discount rate is 7.5 percent and the inflation rate is 2.9 percent.What is the present value of these payments?

Question

Quizplus · Accepted Answer

To find the present value of the payments, we need to first calculate the real discount rate, which is calculated as:
Real discount rate = (1 + nominal discount rate) / (1 + inflation rate) - 1
Real discount rate = (1 + 0.075) / (1 + 0.029) - 1 = 0.044 or 4.4%

Using the real discount rate, we can find the present value of the payments as follows:
PV = CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3
PV = 8,000 / (1 + 0.044)^1 + 8,000 / (1 + 0.044)^2 + 8,000 / (1 + 0.044)^3
PV = $22,004

Therefore, the best choice is B.

You Purchased an Investment Which Will Pay You $8,000,in Real