The company uses Net Present Value to evaluate the financial viability of its capital investments. Forecasts are generally shown in real terms. The real rate of return usually used by DicenSlice plc is 8%. Writing down allowances are available at the rate of 25% reducing balance. The company pays corporation tax at the rate of 20%. This is paid one year in arrears.

The company uses 8% as a real rate for the net present value calculations but with various things going up at different rates it might be better to inflate the costs and revenues then use money rates for the forecast. The figures provided were at prices at the time of forecasting. The general rate of inflation is currently 5%. I think material costs will inflate annually at 8% and wages at 5%.

Question

An investment appraisal for the new dessert pizza: 1. Using todays prices and the real discount rate(Calculating NPV) 2. Using the money rate and inflating costs and revenues appropriately(Recalculating NPV)

Sweet Pizza Estimations: The following information relates to the proposal to bake and sell the new sweet pizzas: Machinery: Initial investment in infrastructure and equipment: f5 million Sweet Pizza Sales forecast: Initial annual demand: 1 million units in year 1 . Annual Growth: +10% annually Price and Cost information (per pizza) All prices are as at 31st December 2022