Chapter 16, Problem 39E

The state’s Secretary of Education is considering the purchase of a new computer for $100,000. A cost study indicates that the new computer should save the Department of Education $30,000, measured in real dollars, during each of the next eight years.

The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes.

Required:

1. 1. Compute the nominal interest rate.
2. 2. Prepare a schedule of cash flows measured in nominal dollars.
3. 3. Using cash flows measured in nominal dollars, compute the net present value of the proposed computer. Use a nominal discount rate equal to the nominal interest rate.