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%.

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

#### Earn Coins

Coins can be redeemed for fabulous gifts.