Question

You are paying a series of five constant-dollar (or real-dollar) uniform payments of $1119.38 beginning at the end of first year. Assume theat the general inflation rate is 13.24 and the market interest rate if 13.24% during this iflationary period. The equivalent present worth of the project is:

Answer 1

ANSWER:

K (INFLATION RATE) = 13.24%

R (INTEREST RATE) = 13.24%

TIME (N) = 5 YEARS

EQUIVALENT PRESENT WORTH CONSTANT DOLLARS = 1119.38 * ( 1 - (1 / ( 1 + R) ^ N )) / R

EQUIVALENT PRESENT WORTH CONSTANT DOLLARS = 1119.38 * ( 1 - ( 1 / ( 1+.1324) ^ 5)) / .1324

EQUIVALENT PRESENT WORTH CONSTANT DOLLARS = 1119.38 * ( 1 - ( 1 / 1.1324 ^ 5 ) ) / .1324

EQUIVALENT PRESENT WORTH CONSTANT DOLLARS = 1119.38 * ( 1 - ( 1 / 1.862) ) / .1324

EQUIVALENT PRESENT WORTH CONSTANT DOLLARS = 1119.38 * ( 1 - 0.537) / .1324

EQUIVALENT PRESENT WORTH CONSTANT DOLLARS = 1119.38 * ( 0.4629 / .1324)

EQUIVALENT PRESENT WORTH CONSTANT DOLLARS = 1119.38 * 3.496

EQUIVALENT PRESENT WORTH CONSTANT DOLLARS = $3914.17

EQUIVALENT PRESENT WORTH CURRENT DOLLARS = 1119.38 * ( 1+K) * ( 1 + R) + 1119.38 * ( 1+K) ^ 2 * ( 1+R) ^ 2 + 1119 .38 * ( 1+ K) ^ 3 * ( 1+R) ^ 3 + 1119.38 * ( 1+K) ^ 4 * ( 1+R) ^4 + 1119.38 * ( 1+ K ) ^ 5 * (1+R)^ 5

EQUIVALENT PRESENT WORTH CURRENT DOLLARS = 1119.38 * ( 1+.1324) * ( 1 + .1324) + 1119.38 * (1+.1324) ^ 2 * ( 1+.1324) ^ 2 + 1119.38 * ( 1+ .1324) ^ 3 * ( 1+.1324) ^ 3 + 1119.38 * ( 1+.1324) ^ 4 * ( 1+.1324) ^4 + 1119.38 * ( 1+ .1324 ) ^ 5 * (1+.1324)^ 5

EQUIVALENT PRESENT WORTH CURRENT DOLLARS = 1119.38 * 1.2823 + 1119.38 * 1.64437 + 1119.38 * 2.1086 + 1119.38 * 2.7039 + 1119.38 * 3.467

EQUIVALENT PRESENT WORTH CURRENT DOLLARS = 1119.38 * (1.2823 + 1.64437 + 2.1086 + 2.7039 + 3.467)

EQUIVALENT PRESENT WORTH CURRENT DOLLARS = 1119.38 * 11.20 = $12,544.48