A project has the following net real cash flows (that is after all costs and tax). Y1: R1000; Y2: R3000; Y3: R5000. The inflation rate is 5% while the company has a WACC (the relevant discount rate) of 10%. Calculate the real rate adjusted discount rate and the NPV at this rate. Choose the nearest, most correct option below. a. R7 145 b. R7 990 c. R8 037 d. R12 513

When adjusting for inflation, there are two methods. The real- rate method where the discount rate is adjusted for inflation and the nominal approach, where real cash flows are adjusted to nominal cash flows. What is the primary drawback of the real-rate approach?

a.

It is more cumbersome to calculate.

b.

Depreciation deductions are adjusted for inflation.

c.

There are no drawbacks.

When adjusting a project in a new industry which the company is not currently operating in, which of the below methods to adjust for risk would be most appropriate:

a.

Certainty equivalents

b.

Risk adjusted cash flow figures.

c.

Risk adjusted discount rate with a divisional beta

d.

Certainty equivalents with a divisional beta