Year 1 PV = 10,000 × 1.05 × 0.877 = $9,209
Year 2 PV = 20,000 × 1.05^2 × 0.769 = $16,957
Year 3 PV = 25,000 × 1.05^3 × 0.675 = $19,535
why do we ^2 ,^3 the inflation rate?, why isnt it just increase of 105% every year? why are we doing 105%*105%?what does specific annual inflation mean ?
thanks
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119 BPP
2y ago
2y ago#1The cash flow are in current terms
So how will you project the cash flows for the 2nd and 3rd year 20000 * 1.05 would only give you the value in year 1 so multiply again and it gives you the value in year 2.
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