The inflation rate is 3.5% a year, and the real interest rate is 2% a year. If a project will provide a perpetual real cash flow of $1,000 a year, what is the project's value?
A)$50,000
B)$17,953
C)$9,804
D)$10,101

Question

Quizplus · Accepted Answer

The value of a project providing a perpetual real cash flow can be calculated using the formula for the present value of a perpetuity: PV = Cash Flow / Real Interest Rate. Here, the real interest rate is given as 2%, or 0.02 in decimal form. Therefore, the project's value is $1,000 / 0.02 = $50,000.

The Inflation Rate Is 3