Inflation Rate Financial Planning Homework Help

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1. Expected inflation rate per year, Selling Price Per Unit – 2%Expected inflation rate per year, Manufacturing Cost per unit – 1.5%Expected inflation rate per year, Fixed operating costs per year – 1.0%
 
2. If the real interest is 3% per annum, the inflation rate is 8% per annum, then what is the value of a $500,000 payment next year?
 
3. You must value a perpetual lease. It will cost $100,000 each year in real terms—that is, its proceeds will not grow in real terms, but just contractually keep pace with inflation. The prevailing interest rate is 8% per year, the inflation rate is 2% per year forever. The first cash flow of your project next year is $100,000 quoted in today”s real dollars. What is the PV of the project? (Warning: watch the timing and amount of your first payment.)
 

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4. Inflation is 2% per year, the interest rate is 8% per year. Our perpetuity project has cash flows that grow at 1% faster than inflation forever, starting with $20 next year.
• What is the real interest rate?
• What is the project PV?
• What would you get if you grew a perpetuity project of $20 by the real growth rate of 1%, and then discounted at the nominal cost of capital?
• What would you get if you grew a perpetuity project of $20 by the nominal growth rate of 3%, and then discounted at the real cost of capital?
Doing either of the latter two calculation is not an uncommon mistake.
 
5. You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14 percent. The nominal annual interest rate in the United States is 3 percent. You expect that annual inflation will be about 4 percent in Mexico and 5 percent in the United States. The spot rate of the Mexican peso is $.10. Put options on pesos are available with a one-year expiration date, an exercise price of $.1008, and a premium of $.014 per unit. You will receive 1 million pesos in one year.
a. Determine the expected amount of dollars that you will receive if you use a forward hedge.
b. Determine the expected amount of dollars that you will receive if you do not hedge and believe in purchasing power parity (PPP).
c. Determine the amount of dollars that you will expect to receive if you believe in PPP and use a currency put option hedge. Account for the premium you would pay on the put option.
 

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