Christopher Construction Company can invest in a project which costs $2,5000 and has a useful life of

Question:

Christopher Construction Company can invest in a project which costs $2,5000 and has a useful life of five years. The project is expected to reduce the firm's operating expenses by $10,000 a year. Depreciation is straight line over five years (no salvage value five year later), the tax rate is 40%, and the cost of capital is 12% in the absence of inflation.

(a) Compute the net present value of the project without the consideration of inflation.

(b) If inflation of 8 percent is expected over the life of the project and cash savings are adjusted upward, what is the project's net present value? Assume an inflation-adjusted discount rate is 20.96 percent.

( Note that the inflation-adjusted discount rate = (1+.12)(1+.08) = 1.209600 ÷ 20.96%)

Net Present Value
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