Guandong Machinery is evaluating a new project to produce encapsulators.

The initial investment in plant and equipment is RMB 200,000. Sales of encapsulators in year 1 are forecasted at RMB 220,000 and costs at RMB 110,000 in nominal terms, or 200,000 and 100,000 in real terms given a 10% inflation. Both are expected to increase by 10% a year in line with inflation. Profits are taxed at 21%. Working capital in each year consists of inventories of raw materials and is forecasted at 20% of sales in the following year (assume that the changes in inventory are -40,000. bot in nominal and in real terms).

The project will last five years and the equipment at the end of this period will have no further value. For tax purposes the equipment can be depreciated straight-line over

these 5 years.

The nominal discount rate is 15%.

Question: Select the correct answer.

Multiple Choice

In real terms, the NPV = 122,828

In real terms, the NPV = 166,556

In real terms, the NPV = 142,025

In real terms, the NPV = 94,365