Question: Refer to the data in the preceding exercise. The states secretary of education is considering the purchase of a new computer for $150,000. A cost

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.

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