Question

A project costs $12,800 and is expected to provide a real cash inflow of $10,000 at...

A project costs $12,800 and is expected to provide a real cash inflow of $10,000 at the end of each of years 1 through 5. Calculate the net present value of this project if inflation is expected to be 4% in each year and the firm employs a nominal discount rate of 10%.

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Answer #1

NPV = Present value of cash inflow (PVCI) - Present Value of cash outflow (PVCO)

PVCO = $ 12,800

PVCI

Nominal cash flow = Real cash flow * ( 1 + inflation rate )

Year Real cash flow Nominal cash flow Present value
1 10,000

10,000 * 1.04

= 10,400

= 10,400 / 1.10

= 9,454.55
2 10,000

10,000 * 1.042

= 10,816

= 10816/1.12

= 8938.84
3 10,000

10,000 * 1.043

= 11,248.64

= 11,248.64 / 1.103

= 8451.27
4 10,000

10,000 * 1.044

= 11698.59

= 11698.59 / 1.104

= 7990.29
5 10,000

10,000 * 1.045

= 12166.53

= 12166.53 / 1.105

= 7554.46
PVCI 42389.41

NPV = 42389.41 - 12,800

       = $ 29,586.41 Answer

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