Evaluate the project''s escalated dollar irr

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Reference no: EM131186689

An investment related to developing a new product is estimated to have the following costs and revenues in today dollars. Do not consider any tax issues.

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(a) Evaluate the project's escalated dollar IRR if both capital costs and operating costs are estimated to escalate at 15% per year from time zero and income is estimated to escalate at 10% per year from time zero.

(b) Evaluate the project's escalated dollar IRR assuming a "washout" of escalation of income and operating costs with a 15% escalation of capital costs per year. "Washout" means any operating cost escalation is offset by the same dollar escalation of revenue (not the same percentage escalation) so that the before-tax profit remains uniform.

(c) Compute the constant dollar IRR of case (b) assuming that the rate of inflation will be 10% per year.

Reference no: EM131186689

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