Refer to the data in the preceding exercise. The states secretary of education is considering the purchase

Question:

Refer to the data in the preceding exercise.

The state’s secretary of education is considering the purchase of a new computer for $150,000. A cost study indicates that the new computer should save the Department of Education $45,000, measured in real dollars, during each of the next eight years.

The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes.

Required:

1. Compute the nominal interest rate.

2. Prepare a schedule of cash flows measured in nominal dollars.

3. Using cash flows measured in nominal dollars, compute the net present value of the proposed computer. Use a nominal discount rate equal to the nominal interest rate.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...