Question
(10 points) You are considering an investment in a new widget machine. The machine will cost $9500 today and it will generate cash flows over
(10 points) You are considering an investment in a new widget machine. The machine will cost $9500 today and it will generate cash flows over the next 6 years. You have estimated that the nominal cash flows for years 1-6 from investing in the new machine will be $1,560, $2,028, $2,530.94, $2,807.66, $3,102.46, and $3,795.96, respectively. The inflation rate over the next 6 years is expected to be 4% per year. The nominal discount rate for the project involving the new widget machine is 12%. Set up a model in Excel that computes the NPV of the project. First calculate the NPV based on nominal quantities (i.e., discount nominal cash flows with nominal rates). Then, calculate the NPV based on real quantities (i.e., discount real cash flows with real rates). Show that the NPV computed using nominal quantities is the same as the NPV of the project computed using real quantities. What is the intuition behind this result?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started