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## We have two independent and mutually exclusive

We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1000, and will yield $500 of cash inflows for the next three years. Project B requires an initial investment of $3,500, and will yield $1,000 of cash inflows for the next five years. The required return on both projects is 10%

What is the real rate of return based on the exact Fisher equation?

**1 + R = (1+r)x (1+h)**

**1+ .10 = (1+r) x (1+0.03)**

**r = 1.10 / 1.03 -1**

**Real Rate of Return = 6.796% = 6.8%**

A. What are the real cash flows from Project A and Project B?

B. What are the real net present values of Project A and Project B? (Hint: The real NPV should be the same as the nominal NPV.)

C. Which project should be chosen based on the real cash flows and real rate of return?

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We have two independent and mutually exclusive

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