PROBLEM: Suppose a business is considering purchasing $40,000 machine that will result in increased sales of $30,000 per year but also increased operating costs of $10,000; additional profits will be taxed at a rate of 50%. Depreciation is assumed to be taken on a straight-line basis over four years with no expected salvage value. What will happen to this projects rate of return if inflation during the next four years is expected to be 10% annually?

CORRECT ANSWER: Increase from 18% to 28%