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Impact of inflation on the prevailing rates

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You are interested in an investment project that cost $7,500 initially. The investment has a 5- year horizon and promises future end-of-year cash inflow of $2,000, $2,000, $2,000, $1,500, and $1,500, respectively. Your current opportunity cost is 6.5% per year. However, the Fed has stated that inflation may rise by 1% or may fall by the same amount over the next 5 years. Assume a direct positive impact of inflation on the prevailing rates (Fisher effect) and answer the following questions.

Reference no: EM131209442

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