Real cash flow occurring in year-2 is $60,000. If the inflation rate is 5% per year, the real rate of interest is 2%, calculate the cash flow for the year-2.
A) $60,000
B) $55,422
C) $66,150
D) None of the above

Question

Quizplus · Accepted Answer

To calculate the nominal cash flow for year-2, adjust the real cash flow for inflation: $60,000 * (1 + 0.05) = $63,000. Then, adjust for the real rate of interest: $63,000 * (1 + 0.02) = $66,150.

Real Cash Flow Occurring in Year-2 Is $60,000