Question

"The ABC Block Company anticipates receiving $59,000 per year in actual dollars from its investments (with no change) over the next 11 years, with the first payment occurring exactly one year from now. If ABC's inflation-free MARR is 12% and the general inflation rate is 2.9%, what is the net present value of these 11 cash flows?"

Answer 1

We shall require to calculate nominal discount rate:

Nominal Discount Rate = (1 + Real Discount Rate)(1 + Inflation Rate) – 1

=(1.12*1.029)-1= 15.248%

We shall use this to calculate the present value:

Year	cash flow	DF	PV
1	$ 59,000.00	0.867694	$     51,193.95
2	$ 59,000.00	0.752893	$     44,420.68
3	$ 59,000.00	0.653281	$     38,543.56
4	$ 59,000.00	0.566848	$     33,444.02
5	$ 59,000.00	0.49185	$     29,019.17
6	$ 59,000.00	0.426776	$     25,179.76
7	$ 59,000.00	0.370311	$     21,848.33
8	$ 59,000.00	0.321316	$     18,957.66
9	$ 59,000.00	0.278804	$     16,449.45
10	$ 59,000.00	0.241917	$     14,273.09
11	$ 59,000.00	0.20991	$     12,384.68
		Net present value	$ 305,714.35

The discount factors are calculated as = 1/(1.15248^n) where n is the number of year