Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
The company you work for is considering a new product line that is projected to have the net cash flows below (in $1000). The values are in future dollars which have been inflated by 5% per year. The plant manager isn’t sure about how the present worth of the cash flows should be calculated, so he asked you to do it two ways over the 4-year planning horizon: (1) using an inflation-adjusted rate of 20% per year, and (2) converting all of the cash flows to current-value dollars and using a real interest rate. You said both ways will provide the same answer, but he asked you to show him the calculations. Prepare the present worth computations by methods (1) and (2).
Transcribed Image Text:Year
Cash Flow, $1000
- 10,000
1
2,000
5,000
5,000
4
5,000
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