Question
The folowing information is available about an investment opportunity. Investment will occur at time 0 and sales will commence at time 1. Initial cost $28
The folowing information is available about an investment opportunity. Investment will occur at time 0 and sales will commence at time 1.
Initial cost | $28 million | ||
Unit sales | 400,000 | ||
Selling price per unit, this year | $60.00 | ||
Variable cost per unit, this year | $42.00 | ||
Life expectancy | 8 years | ||
Salvage value | $0 | ||
Depreciation | Straight-line | ||
Tax rate | 37% | ||
10% | |||
Real discount rate | 10% | ||
Inflation rate | 0% |
A. Prepare a spreadsheet to estimate the projects annual ATCFs.
B. Calculate the investments internal rate of return and its NPV.
C. How do your answers to questions (a) and (b) change when you assume a uniform inflation rate of 8 percent a year over the next 10 years? (Use the following equation to calculate the nominal discount rate: in = (1 + ir)(1 + p) 1, where in is the nominal discount rate, ir is the real discount rate, and p is expected inflation.)
D. How do you explain the fact that inflation causes the internal rate of return to increase and the NPV to decrease? e. Does inflation make this investment more attractive or less attractive? Why?
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