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Guandong Machinery is evaluating a new project to produce encapsulators. The initial investment in plant and equipment is RMB 500,000. 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 (the change in inventory is 40,000 during the first year, both 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. In nominal terms, the NPV is 91,207 In nominal terms, the NPV is 95,340 In nominal terms, the NPV is 98,630 In nominal terms, the NPV is 85,254 Suppose that Sudbury Mechanical Drifters is proposing to invest $20 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 21%, and the discount rate is 8%. Question: What is the present value of the depreciation tax shield? Multiple Choice 21 1.6 28 1.4