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FIN 2200 – CORPORATION FINANCE
Sum /2007
Assignment #5 key
Professors: A. Dua
1.
Suppose the nominal discount rate is 10.21% and the expected inflation rate is 3%.
Consider a 10payment annuity of $120,000 (real cash flow) per year with the first
payment due in one year’s time.
a)
Determine the NPV of the annuity using the
regular annuity
formula and
real
amounts.
real interest rate
07
.
1
03
.
1
1021
.
1
=

=
or 7%

=
10
)
07
.
1
(
1
1
07
.
000
,
120
PV
$842,829.78
b)
Show how to get the same result with the
growing annuity
formula and
nominal
amounts.


=
10
1021
.
1
03
.
1
1
03
.
1021
.
0
)
03
.
1
(
000
,
120
PV
$842,829.78
2.
Suppose the expected real discount rate is 7% and the expected inflation rate is 4%.
Consider a 12payment annuity of $160,000 (nominal cash flow) per year with the first
payment due in one year’s time.
a)
Determine the NPV of the annuity using the
regular annuity
formula and
nominal
amounts.
nominal interest rate = [(1.07)(1.04)] – 1 = 0.1128

=
12
)
1128
.
1
(
1
1
1128
.
000
,
160
PV
$1,025,065.87
b)
Show how to get the same result with the
growing annuity
formula and
real
amounts. (Note: The growth rate is
not
–4%)
03846154
.
0
1
04
.
1
1
g

=

=




=
12
07
.
1
03846154
.
1
1
)
03846154
.
(
07
.
0
04
.
1
000
,
160
PV
$1,025,065.87
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Page 2 of 4
Assignment #5 key
Professors: A. Dua, J. Falk, A. Paseka, R. Scott
3.
The Churchill Bay Mining Company Inc. (CBMC) is considering a project to bring the
proposed “Chaparral II” mine into production phase. The CBMC currently has a 5year
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 Three '09
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 Inflation

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