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Capital Budgeting and Balance Sheet Analysis

Initial cost $10 million
Unit sales 100,000
Selling price per unit this year $50.00
Variable cost per unit, this year $20.00
Life expectancy 10years
Salvage value $0
Depreciation - Straight line
Tax rate 34%
Nominal discount rate 10%
Real discount rate 10%
Inflation rate 0%

1.Prepare a spreadsheet to estimate the project annual after-tax cash flows.
2. Calculate the IRR and NPV
3.Re-calculate A & B when you assume a uniform inflation rate of 8% over a year over the next 10 years. {in = (1 + ir) (1 + p) - 1} where in is the nominal discount rate, ir is the real discount rate, and p is expected inflation.
4. Explain why that inflation causes the IRR to increase and the NPV to decrease?
5. Did inflation make the investment more or less attractive?

Solution Summary

The solution explains the calculation of project cash flows and the calculation of NPV and IRR