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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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