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Engineering Economics &/OR Corporate Finance question...

post #1 of 2
5/13/11 at 2:24am
Thread Starter 
I am also having problem with a question involving interest and inflation. This is the question:

An investor lends $15,000 today to be repaid in a lump sum at the end of 10 yrs with an interest rate of 8% compounded annually.

A: what is the real rate of return if the general price inflation is 6% annual?

B: What is the $15,000 repaid worth in today's dollars?




Interest and inflation alone is easy to deal with if only one of each is computed. Though the mixture of both is throwing me off a bit.
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post #2 of 2
5/14/11 at 5:21pm

I've never taken an economics class, so I could be conceptualizing this wrong, but it seems like you would just calculate the amount without adjusting for inflation first, then just multiply that by (.94)^10.

 

Basically:

$15000(1.08)^10 * (.94)^10 = $17442.44

or, you could multiply inflation and the interest rate together first before raising it to the 10th, like this:

$15000(1.08*.94)^10 = $17442.44

 

This also gives you the actual rate of return, which is just 1.08*.94 = 1.0152, which is 1.52%

 

I think

 

Hope this helped!

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