Excalibur Company is planning on introducing a new product that will have a 2-year life.

Producing the product requires an initial outlay of $20,000; it will generate after-tax cash in¬

flows of $11,000 and $12,000 in the 2 years. The company's cost of capital is 12%. During the coming 2 years, inflation is expected to average 5%. The cash flows have not been ad¬

justed for inflation. The cost of capital, however, reflects an inflationary component.

Required:

1. Compute the NPV using the unadjusted cash flows.

2. Compute the NPV using cash flows adjusted for inflationary effects.