About an investment opportunity

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The following information is available about an investment opportunity. Investment will occur at time 0 and sales will commence at time 1. Initial cost Unit sales Selling price per unit, this year Variable cost per unit, this year Life expectancy Salvage value Depreciation Tax rate Nominal discount rate Real discount rate Inflation rate $28 million 400,000 $60.00 $42.00 8 years $0 Straight-line 37% 10.0% 10.0% 0.0%

a. Prepare a spreadsheet to estimate the project’s annual ATCFs.

b. Calculate the investment’s internal rate of return and its NPV.

c. How do your answers to questions (a) and (b) change when you assume a uniform inflation rate of 8 percent a year over the next 10 years? (Use the following equation to calculate the nominal discount rate: in = (1 + ir)(1 + p) – 1, where in is the nominal discount rate, ir is the real discount rate, and p is expected inflation.)

Reference no: EM131618895

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