In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the United States. What

In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the United States.

What was the real interest rate in 1975? How would the purchasing power of your savings have changed over the year?

Q16

Consider a project that requires an initial investment of $100,000 and will produce a single cash flow of $150,000 in five years.

a. What is the NPV of this project if the five-year interest rate is 5% (EAR)?

b. What is the NPV of this project if the five-year interest rate is 10% (EAR)?

c. What is the highest five-year interest rate such that this project is still profitable?