The cash flow distribution associated with a five-year project is shown below. A

Question

The cash flow distribution associated with a five-year project is shown below. Assuming that the cash flows are given in that year's $ ad that a general monetary inflation rate of 5% applies throughout the project's life, determine the net present value using a minimal acceptable rate of return of 12% [$5,472] Assuming that the cash flows are given in that year's $ and that a general monetary inflation rate of 6.25% applies throughout the project's life, determine the net present value using a minimal acceptable rate of return of 12% [$5,004]

Explanation / Answer

Enter the cash flows given in the excel sheet as follows

a) Since the inflation rate is 5%, and minimal required rate of return is 12.0%, the nominal required rate of return is 12+5 = 17.00%

So NPV of the project using 17% required rate of return can be calculated in an excel sheet as follows

NPV =NPV(17.00%,B3:B7) - 10000 = $5,472.27

Here cells B3 to B7 have cash flows from year 1 till year 5

b) Since the inflation rate is 6.25%, and minimal required rate of return is 12.0%, the nominal required rate of return is 12+6.25 = 18.25%

So NPV of the project using 18.25% required rate of return can be calculated in an excel sheet as follows

NPV =NPV(18.25%,B3:B7) - 10000 = $5,004.45

Here cells B3 to B7 have cash flows from year 1 till year 5

Year Cash flow 0          (10,000.00) 1              4,000.00 2              4,400.00 3              5,000.00 4              5,500.00 5              6,100.00

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