Your sales are $10 million this year and expected to grow at 5% in real terms for the next three years. The appropriate nominal discount rate is 10%. The inflation is expected to be 2% per year during the same period. What is the present value of your sales revenue for the next three years?

• $19.22M
• $24.87M
• $27.23M
• $28.45M
• $29.2M

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.

Solution: D

Year 1: [math]10 \times\left(\frac{1.05 \times 1.02}{1.10}\right)^1=9.7364[/math]

Year 2: [math]10 \times\left(\frac{1.05 \times 1.02}{1.10}\right)^2=9.4797[/math]

Year 3: [math]10 \times\left(\frac{1.05 \times 1.02}{1.10}\right)^3=9.2298[/math]

PV: 9.7364+9.4797+9.2298= $28.4458 million.

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.