What is the real interest rate

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Reference no: EM131234434

Inflation is 2% per year; the interest rate is 8% per year. Your perpetuity project has cash flows that grow at 1% faster than inflation forever, starting with $20 next year.

(a) What is the real interest rate, both accurate and approximate?

(b) What is the correct project PV?

(c) What would you get if you grew a perpetuity project of $20 by the real growth rate of 1%, and then discounted it at the nominal cost of capital?

(d) What would you get if you grew a perpetuity project of $20 by the nominal growth rate of 3%, and then discounted it at the real cost of capital? Performing either of the latter two calculations is not an uncommon mistake in practice.

Reference no: EM131234434

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