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You will receive $5,000 one year from now, 6000 three years from now, and 7000 five years from now in real terms. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 9.625 percent and the inflation rate is 2.3 percent. What are your winnings worth today in real dollars

Answer :

Answer:

$14,495.56

Explanation:

The value of the earnings today can be determined using a financial calculator.

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 = $5,000

Cash flow in year 2 = 0

Cash flow in year 3 = $6,000

Cash flow in year 4 = 0

Cash flow in year 5 = $7,000

I = 7.16%

PV =

According to the fisher equation : (1 + nominal interest rate) = (1 + real interest rate) x (1 + inflation rate)

(1.09625) = (1 + real interest rate) x (1.023)

(1 + real interest rate) = 1.09625 / 1.023

real interest rate = 7.16%

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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