SOLUTION: Hi, please can i get some help with this. On 1 January 2008, Bob Jones received a lump sum of R200 000. He invested the full amount in a fixed deposit paying interest at 7% Per

Question 918555: Hi, please can i get some help with this.
On 1 January 2008, Bob Jones received a lump sum of R200 000. He invested the full amount in a fixed deposit paying interest at 7% Per annum, compounded monthly. the maturity date of this investment is 31 December 2010. the following annual inflation rates have been predicted for the given calender years: 2008 - 8.3%, 2009 - 8.5%, 2010 - 8.7%. Bob regards the annual inflation rate as his personal required rate of return for that particular year.
Required:
A) Without the use of interest tables, calculate the Net Present Value of this investment.
Answer by rothauserc(4718) (Show Source): You can put this solution on YOUR website!
we use the following formula,
FV = P(1 + r/n)^tn, where P is the principal, r is rate, n is number of times compounded per year, FV is future value, therefore
FV = 200000(1 + .07/12)^(3*12) = 246585.117495385 approx R246585.12
inflation tells us how much our principal will be worth today vs in our case 3 years ago,
2008 principal = 200000 - (200000*.083) = 183400
2009 principal = 183400 - (183400*.085) = 167811
2010 principal = 167811 - (167811*.087) = 153211.443 approx 153211.44
now 200000 - 153211.44 = R46788.56 is how much R's we have lost to inflation
Net Present Value of this investment = R246585.12 - R46788.56 = R199796.56

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