Question: A company wishes to invest in a five-year project with the following cash flow profile:
Amount
Initial capital outlay $50,000
Annual before tax cash flow (real) $25,000
If the (nominal) discount rate for the company is 10% and the inflation rate is 5%, determine the following:
a) Determine the cash flow after tax in nominal terms if the tax rate is 35% and the depreciation is calculated on a straight-line basis over five years.
b) Determine the NPV for the free cash flow in nominal terms.
c) Determine the cash flow after tax in real terms if the tax rate is 35% and the depreciation is calculated on a straight-line basis over five years.
d) Determine the NPV for the free cash flow in real terms.