Problem:
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%
Q1. Prepare a spreadsheet to estimate the project annual after-tax cash flows.
Q2. Calculate the IRR and NPV
Q3. 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.
Q4. Explain why that inflation causes the IRR to increase and the NPV to decrease?
Q5. Did inflation make the investment more or less attractive?