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The expected cash flow forecasts of an investment are listed on the table below. The investment has a 1 2 % cost of capital and

The expected cash flow forecasts of an investment are listed on the table below.
The investment has a 12% cost of capital and a 5-year holding period. The depreciation will be
calculated using straight line method and ignoring salvage value.
Initial investment ($ thousands)15,000
Salvage value ($ thousands)2,500
Initial revenues ($ thousands)15,000
Variable costs (% of revenues)40.0%
Initial fixed costs ($ thousands)4,500
Inflation rate (%)4.0%
Discount rate (%)10.0%
Receivables (% of sales)18.0%
Inventory (% of next year's costs)15.0%
Tax rate (%)21.0%
Calculate: (a) Cash flows from working capital; (b) Cash flows from operating; (c) NPV of this
investment; and (d) NPV of the investment, if the forecasted inflation rate changes from 4% to 8%
and the discount rate changes from 10% to 14%

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