Question
You are considering a new project, which costs $600,000 and is expected to have the following nominal cash flows of $200,000, $220,000, $220,000, $200,000, and
You are considering a new project, which costs $600,000 and is expected to have the following nominal cash flows of $200,000, $220,000, $220,000, $200,000, and $180,000 in years 1 through 5. The companys nominal cost of capital is 10%. The expected inflation rate is 2.5%. (A) Estimate the companys real cost of capital. (B) Estimate the projects net present value, based on nominal cash flows and nominal discount rate. (C) Estimate the projects net present value, based on real cash flows and the real discount rate. Does your accept-reject decision change from your answer in part (B)?
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