Question

1) The r in the Fisher equation represents:

A) nominal rate of return of inflation. B) real rate of return net of inflation.
C) nominal rate of return plus inflation. D) real rate of return plus inflation. E) none of the above.

2)Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for five years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project's net present value?

A) -$46,028.92 B) $39,487.15 C) -$38,399.55 D) $67,653.02 E) $18,715.97

Answer 1

Ques-1)

Fisher's Equation:

where, i = Nominal rate of return

r = Real-rate of return

π = inflation rate

So, r is Nominal rate of return net of Inflation

hence, Option A

Ques- 2)

Calculating the NPV of the Project's:-

Year	Cash Flows of project ($)	PV Factor @18.60%	Present Value of Project ($)
0	(211,600.00)	1.00000	(211,600.00)
1	-	0.8432	-
2	-	0.7109	-
3	-	0.5994	-
4	151,000.00	0.5054	76,319.97
5	151,000.00	0.4262	64,350.73
6	151,000.00	0.3593	54,258.63
7	151,000.00	0.3030	45,749.27
8	151,000.00	0.2555	38,574.42
		NPV	67,653.02

So, the NPV of the Project is $ 67,653.02

Hence, Option D

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating