The real cash flow occurring in year 2 is $60,000

Accounting Oct 15, 2020

The real cash flow occurring in year 2 is $60,000. If the inflation rate is 5 percent per year and the real rate of interest is 2 percent per year, calculate the nominal cash flow for year 2.
$60,000 $62,424 $66,150 $63,654

Expert Solution

Nominal Cash Flow = Real Cash Flow * ( 1 + Inflation Rate )^Numbe rof Periods

= $60,000 * ( 1 + 0.05 )^2

= $60,000 * 1.05^2

= $60,000 * 1.1025

= $66,150

When we calculate the Nominal Cash Flow, Accroding to formula we used to multiply it by Inflation rate not by Real rate of interest.

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