Question

Assume a new investment project is expected to generate free cash flows of $1,000 and $1,000 in 2023 (first year) and 2024 (Second year), respectively. The forecasted annual inflation is 6% a year.

Show (4) the real free cash flow (after inflation rate is considered) in 2023 (First Year) and 2024 (Second Year).

Answer 1

To calculate the real free cash flow after inflation is considered, divide the cash flows by 1 plus the inflation rate. The real free cash flow in 2023 is $943.40 and in 2024 is also $943.40.

Step-by-step explanation:

To calculate the real free cash flow after inflation is considered, we need to adjust the cash flows for the annual inflation rate. In this case, the forecasted annual inflation rate is 6%.

For the first year, the real free cash flow in 2023 can be calculated by dividing the cash flow for that year by 1 plus the inflation rate:

(Cash flow in 2023) / (1 + Inflation rate) = $1,000 / (1 + 0.06) = $943.40

For the second year, the real free cash flow in 2024 can be calculated in the same way:

(Cash flow in 2024) / (1 + Inflation rate) = $1,000 / (1 + 0.06) = $943.40