Engineering Board Exam Reviewer · Inflation and Real Interest Rates · hard

A project yields P500,000 per year in today's (constant) pesos for 10 years, so the actual receipts rise with 5% annual inflation. The market interest rate is 9.2%. Find the present worth.

  1. P3,180,772.84
  2. P3,860,867.46
  3. P5,000,000
  4. P4,055,447.89

Answer

D. P4,055,447.89

Solution

The real interest rate is 1.092/1.05-1=0.04. Discounting constant pesos at the real rate: PW=500,000(P/A,4%,10)=500,000(8.1109)=P4,055,447.89.

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