Reference no: EM131188157
You are considering a new project, which costs $600,000 and is expected to have the following nominal cash flows of $200,000, $220,000, $220,000, $200,000, and $180,000 in years 1 through 5. The company’s nominal cost of capital is 10%. The expected inflation rate is 2.5%.
(A) Estimate the company’s real cost of capital.
(B) Estimate the project’s net present value, based on nominal cash flows and nominal discount rate.
(C) Estimate the project’s net present value, based on real cash flows and the real discount rate. Does your accept-reject decision change from your answer in part (B)?
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