Exercise 5-2 Net present value method and inflation A company considers purchasing a machine for € 6,000 at the beginning of year 1. It has a three-year economic life and will reduce annual labour expenses by € 2,700. The investors'

expectations of inflation are included in the required rate of return which is 10 %. Inflation is 4 %. Is this an attractive investment? Compute the net present value ignoring inflation first

(a) and then recognising inflation

(b) to show that choosing the appropriate cash flows and discount rate will lead to the same net present value.