IRR means the rate at which the NPV equal to zero, that means @10% the NPV of the project is NIL. Real return is the rate of return before inflation adjustment. Nominal rate of return in the inflation adjusted return. 10% given in the question is IRR, let assume the rate of return at Y1 is zero and we get a revenue of 400,000.the industry growth rate is 8% Then the revenue based on RRR is 400,000*8%=432,000. The nominal rate of return in Y2 is ( 0 +3) 3%. Hence the revenue based on NRR 400,000+(400,000*3%)= 412,000
412,0000+(412,000*8%)=444,960
Answer is (A) $432,000 real and $444,960 nominal.
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Darwin Wilson
Accountant
DARWIN WILSON, SOLUSYS CONSULTANCY LLC , A8, LIGHT
DUBAI
United Arab Emirates
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Original Message:
Sent: 12-13-2010 06:49 PM
From: Sarika Anand
Subject: I need Help for part 3 Qs
199) The owner of Woofie’s Video Rental cannot decide how to project the real costs of opening a rental store in a new shopping mall. The owner knows the capital investment required but is not sure of the returns from a store in a new mall. Historically, the video rental industry has had an inflation rate equal to the economic norm. The owner requires a real internal rate of return of 10%. Inflation is expected to be 3% during the next few years. The industry expects a new store to show a growth rate, without inflation, of 8%. First year revenues at the new store are expected to be $400,000.
The revenues for the second year, using both the real rate approach and the nominal rate approach, respectively, would be
a. $432,000 real and $444,960 nominal.
b. $432,000 real and $452,000 nominal.
c. $440,000 real and $452,000 nominal.
d. $440,000 real and $453,200 nominal.