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 inflows of \($11,000\) and \($12,000\) in the two years. The company’s cost of capital is 12 percent. During the coming two years, inflation is expected to average 5 percent.

The cash flows have not been adjusted 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.