1 A company buys a machine today for $10,000

2

Material costs at current prices will be $1,500 pa for three years

Material costs inflate at 8% pa

3

Labour savings at current prices will be $4,000 pa for three years

Labour costs inflate at 5% pa

4

Overhead savings at current prices will be $2,000 pa for three years

Overhead costs inflate at 10% pa

5

Money cost of capital - 15.5%

6

General inflation = 7%

Required:

Calculate the NPV of the project, using:

(i) the money method;

(ii) the effective method;

(iii) the real method.

Ignore taxation.