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Question 1 22 minutes 12 marks The Sweet Shop is considering buying new equipment with an initial investment of N$32 000, The equipment has a
Question 1 22 minutes 12 marks The Sweet Shop is considering buying new equipment with an initial investment of N$32 000, The equipment has a 5-year life with cash inflows in years 1 to 5 of N$11 500, N$12 000, N$12 500, 10 000, and N$9 500, respectively. The real rate of return is 6%. The economists, however, have forecasted that inflation may rise by 1% or may fall by 1% over the next five years. Inflation will only influence the opportunity cost since the cash inflows are fixed. REQUIRED: MARKS 1.1 Calculate the net present value (NPV) of investment using the real rate of return. 3 1.2 Calculate the net present value (NPV) under a period of rising inflation 1.3 Calculate the net present value (NPV) under a period of falling inflation. 1.4. Based on your answers in part 1.1, 1.2 and 1.3, describe the relationship between changes in inflation and asset valuation TOTAL MARKS 12
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