1. A small manufacturing operation expects real net cash flows of $155,000. The company is ongoing but expects competitive pressures to erode its real net cash flows at 5% per year in perpetuity. The appropriate real discount rate for Philips is 11%. All net cash flows are received at year end. What is the present value of the net cash flows from the operations?
2. The company must choose between two copiers, Sys A costing $1,500 and will last for 3 years. Sys A will require a real after-tax cost of $120 per year after all relevant expenses. Sys B costs $2,300 and will last five years. The real after-tax cost is $150 per year. All cash flows occur at the end of the year. The inflation rate is expected to be 5% per year and the nominal discount rate is 14%. Which copier should the company choose?
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The solution explains how to calculate the net present value of cash flows.