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  • #16019

    The inflation rate is 1.5% per year. The real rate of return is 2.0% per year. A perpetuity project that paid $100 this year will provide income that grows by the inflation rate. Show what this project is truly worth. Do this in both nominal and real terms. (Be clear on what never to do.)

    #16020
    admin
    Keymaster

    Solution
    The nominal interest rate is 0.99 * 1.03 – 1 ≈ 1.97%.
    Therefore, the cash flow is worth about
    = $1000000/1.0197 ≈ $980,681.

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