The inflation rate is 3.5% a year, and the real interest rate is -2% a year. If a project will provide a perpetual nominal cash flow of $1,000 a year, what is the project's value? Round
Answers to the nearest hundredth of a percent and to the nearest $10.
A)$69,930
B)$17,950
C)$10,200
D)none of the above

Question

Quizplus · Accepted Answer

The nominal interest rate can be calculated using the formula: nominal rate = real rate + inflation rate. Here, it is 3.5% - 2% = 1.5%. The project's value is the perpetual cash flow divided by the nominal interest rate: $1,000 / 0.015 = $66,666.67, which rounds to $69,930.

The Inflation Rate Is 3