An investment of $1.5 million is expected to generate cash flows of $625 000 p.a. ,at constant prices,over the next three years.The required rate of return,assuming zero inflation,is 17% p.a.If prices are expected to increase at the rate of 10% p.a. ,the project's net present value is:
A)($119 009)
B)$159 456
C)($343 856)
D)$19 090

Question

Quizplus · Accepted Answer

The NPV is calculated by discounting the cash flows at the real rate of return, which is adjusted for inflation. The real rate is approximately 6.36% (calculated using the formula (1+nominal rate)/(1+inflation rate) - 1). Discounting the cash flows of $625,000 over three years at this rate and subtracting the initial investment results in an NPV of approximately ($119,009).

An Investment of $1