Question

Please show in excel

A new production line generates the following incremental cash flows over its 5-year useful life.

Year

1

2

3

4

5

Cash flow ($ million)

1.5

1.3

1.05

0.9

0.7

What is the present worth of these cash inflows given that the cost of capital for the project is 12%?
Given that the forecasted inflation rate is 3% per year over the period estimate the real cash flows (expressed in terms of year 0 dollars) and present worth.

Answer 1

Using the NPV function in excel, the present worth of the cash flows is found to be = $ 4.09 million

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Real cash flow = Nominal cash flow ( 1+inflation rate)^t

Year	Cash flow in million	Real cash flow in million
1	$1.50	$1.46
2	$1.30	$1.23
3	$1.05	$0.96
4	$0.90	$0.80
5	$0.70	$0.60

The present worth of real cash flows in excel is calculated as follows

The net present worth of the real cash flows = $ 3.81 million