Aproject costs $12,800 and is expected to provide a real cash inflow of $10,000 at the end of each of years 1 through 5. calculate the net present value of this project if inflation is expected to be 4% in each year and the firm employs a nominal discount rate of 10.76%. $26,311.15 $33,522.30 $28,756.79 $33,294.07

Net Present Value = $28756.79

Explanation:

First we need find the real rate of interest

Real rate of interest = (Nominal rate of interest - Inflation rate )

Real Rate of interest = (10.76% - 4%)

Real of Interest = 6.76%

Now using stream of cash flows and discount the at 6.76%

0-12800              1.000        

110000               0.937

210000               0.877

310000               0.822

410000               0.770

510000               0.721

Through multiplying discount value with cash flow we get the discounted value of cash flows.

0-12800      x        1.000      = -12800  

110000       x       0.937      =     9370

210000       x        0.877     =     8770

310000       x        0.822     =    8220

410000       x        0.770      =   7700

510000       x        0.721       =  7210

Adding the discounted cash flows we get the value of Net present value and that is equal to $28756.79

the interest will be $59.71

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