Question

Assume that you borrow $15,000 for five years (annual payments) at a market rate of 5%. Assuming that inflation is 3.5%, what would the equivalent equal annual payment be in constant dollars?

Answer 1

PV = 15,000, FV = 0, N = 5, rate = 5%'

use PMT function in Excel

annual payment = 3,464.622

Discount rate	3.5000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
-	0	-	-
3,464.622	1	3,347.46	3,347.46
3,464.622	2	3,234.26	6,581.72
3,464.622	3	3,124.89	9,706.61
3,464.622	4	3,019.22	12,725.83
3,464.622	5	2,917.12	15,642.95

total value in constant dollars = 15,642.95

Equivalent annual payment = 15,642.95/5 = 3,128.59