Compute the npv using cash flows adjusted for inflationary, Accounting Basics

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Compute the npv using cash flows adjusted for inflationary

Question:

INFLATION

Excalibur Company is planning on introducing a new product that will have a 2-year life. Producing the product requires an initial outlay of $20,000; it will generate after-tax cash inflows of $11,000 and $12,000 in the two years. The company's cost of capital is 12 percent. During the coming two years, inflation is expected to average 5 percent.

The cash flows have not been adjusted for inflation. The cost of capital, however, reflects an inflationary component.

Required:

1. Compute the NPV using the unadjusted cash flows.

2. Compute the NPV using cash flows adjusted for inflationary effects.

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Accounting Basics: Compute the npv using cash flows adjusted for inflationary

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Accounting Basics: Compute the npv using cash flows adjusted for inflationary

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