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The state’s Secretary of Education is considering the purchase of a new computer for $100,000. A...

The state’s Secretary of Education is considering the purchase of a new computer for $100,000. A cost study indicates that the new computer should save the Department of Education $30,000, measured in real dollars, during each of the next eight years. The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Exercise 16-39 Part 1 Required: Compute the nominal interest rate. (Enter your answer as a decimal not as a percentage (e.g., enter 12% as 0.12).

Solutions

Expert Solution

Nominal interest rate = [(1 + Inflation rate)*(1 + Real rate of interest)] – 1

                                  = [(1 + 0.10)*(1 + 0.20)] – 1

                                  = (1.10*1.20) – 1

                                  = 1.32 – 1

                                  = 0.32

                                  = 32%

ekkarill92 answered 1 year ago
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