The following information is available about an investment opportunity. Investment will occur at time 0 and sales will commence at time 1.
Initial cost $10 million
Unit sales 100,000
Selling price per unit, this year $50
Variable cost per unit, this year $20
Life expectancy 10 years
Salvage Value $0
Tax rate 34%
Nominal discount rate 10%
Real discount rate 10%
Inflation rate 0%
a. Prepare a spreadsheet to estimate the project's annual after-tax cashflows.
b. Calculate the investment rate of return and its NPV.
c. How do your answer to questions (a) and (b) change when you assume a uniform inflation rate of 8% percent a year over the next 10years? (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 the expected inflation.)
e. Does inflation make this investment more attractive or less attractive? why?© BrainMass Inc. brainmass.com June 3, 2020, 10:11 pm ad1c9bdddf
Calculate the investment rate of return and the NPV of an investment opportunity. Also analyses the impact of inflation on the NPV of the project.