infltn - 11 12 13 14 15 16 17 18 19 Page 3 NPV CAN BE...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Page 1 INFLATION AND THE REAL RATE OF INTEREST Interest rate 12.00% Inflation rate 5.00% Real interest rate 6.67% ( 1 + Interest Rate ) / ( 1 + Inflation Rate ) - 1 EXAMPLE Cash today 100.00 Plus interest 12.00 Cash next year 112.00 Price today 106.67 Plus inflation 5.33 Price next year 112.00 A B C D E F G H 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Page 2 INFLATION AND CONSTANT DOLLAR FACTORS Current price 200.00 Inflation rate 5.00% Year 0 1 2 3 Price 200.00 210.00 220.50 231.53 Inflation factor 100.00% 105.00% 110.25% 115.76% Inflation Factor = Previous Inflation Factor x ( 1 + Inflation Rate ) Price 200.00 210.00 220.50 231.53 Constant dollar factor 100.00% 95.24% 90.70% 86.38% Price in constant dollars 200.00 200.00 200.00 200.00 Constant dollar factor = 1 / Inflation Factor Constant dollar factor = Previous Constant Dollar Factor / ( 1 + Inflation Rate ) A B C D E F G 1 2 3 4 5 6 7 8 9 10
Background image of page 2
Background image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 11 12 13 14 15 16 17 18 19 Page 3 NPV CAN BE CALCULATED IN NOMINAL OR REAL TERMS Interest rate 12.00% Inflation rate 5.00% Real interest rate 6.67% Year 1 2 3 Cash flow (400,000) 100,000 200,000 300,000 PV factor 100% 89% 80% 71% PV of cash flow (400,000) 89,286 159,439 213,534 Cumulative PV (400,000) (310,714) (151,276) 62,259 NPV 62,259 Cash flow (400,000) 100,000 200,000 300,000 Constant dollar factor 100% 95% 91% 86% Real cash flow (400,000) 95,238 181,406 259,151 Cash Flow x Const $ Factor Real PV factor 100% 94% 88% 82% Real PV (400,000) 89,286 159,439 213,534 Real CF x Real PV Factor Cumulative real PV (400,000) (310,714) (151,276) 62,259 NPV 62,259 A B C D E F G H 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21...
View Full Document

This note was uploaded on 06/28/2010 for the course MKTG 00HP01 taught by Professor Himanshu during the Spring '10 term at Indiana Institute of Technology.

Page1 / 3

infltn - 11 12 13 14 15 16 17 18 19 Page 3 NPV CAN BE...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online