Question

You will receive $5,000 a year in real terms for the next 5 years. 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?

Question 8 options:

	$20,413
	$19,367
	$20,781
	$21,500
	$19,137

Answer 1

Real rate of return = (1 + Nominal rate)/(1 + Inflation rate) - 1

= (1+9.625%)/(1+2.3%) - 1

= 0.071603

Present value of real cash flows = Cash flow * ((1 - (1+R)^-N)/R

= 5000*((1-(1+0.071603)^-5)/0.071603

= 5000*4.082658

= 20413