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Could you provide me with workings for how to arrive at answers for the following please:
1. a project requires an investment of $24000 at time 0, and generates and inflow of $5000 per year for 8 years (with the first inflow occurring in one years time). What is the IRR (to the nearest %)
2. KJG Co has a real cost of capital of 8%. Inflation is 5%. What is the nominal (money) cost of capital
1 Since it is an annuity, the PV of 24,000 is equal to 5,000 x the 8 year annuity factor.
So the 8 year annuity factor must be 24,000/5,000 = 4.800You can then look through the annuity tables to see which rate of interest gives an 8 year annuity factor closest to 4.800.
(Alternatively, you can make two guesses in the normal way, but since it is an annuity it is much quicker to do it as above)
The free lecture on discounting will help you.
2 This is using the Fisher formula on the formula sheet.
(1 + i) = (1.08) x (1.05) = 1.134
So the nominal cost of capital = i = 0.134 (or 13.4%)
pleae i soved this question by considering the term'(with the first inflow occurring in one years time.that was what confused me to use the first to be 2-7 years and 8th years.what is the significance of that statement in the question.
There are certainly 8 years of flows. But for discounting it matters when the first of the 8 flows is. (The first flow could be now, it could be in one year, it could be in 2 years etc. and it will effect the discounting).
That is why you are told that the first flow is in 1 years time – time 1.
Therefore the flows are from time 1 to time 8 inclusive, and we can use the annuity discount factor directly.
(I don’t understand why you write 2-7 and 8th year)
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