A project’s net cash flow, valued at current prices, is given by:

Year 0 1 2 3 4 5 Net Cash Flow ($): −1000 250 250 250 250 250 i The nominal or money rate of interest is 8% and the anticipated rate of general price inflation over the next five years is 3%. Calculate the NPV of the net cash flow:

a using the real rate of interest as the discount rate;

b using the nominal rate of interest as the discount rate.

ii Suppose that you are told that all prices used to calculate the project net cash flow in years 1–5 are expected to rise at 5% (2% above the general rate of inflation).

Recalculate the NPV of the net cash flow:

a using the real rate of interest as the discount rate;

b using the nominal rate of interest as the discount rate.