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Calculate the NPV of the project using nominal values

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Reference no: EM132994053

Question - You are considering purchasing a machine to produce golf balls. The cost of the machine is RM100,000 and its expected life span is 8 years. The machine will have an annual production of 550,000 balls. The price of a golf ball is today RM0.20, and it is expected to rise by 10% each year. The material used to produce a golf ball costs RM0.08 and it is expected to rise by 2% a year. To operate the machine, you will need two workers, each earning an annual salary of RM30,000. According to their contracts their salaries will rise by 7% a year starting in the third year. The real discount rate is 4%, the expected inflation is 5%, and the corporate tax rate is 40%. Consider the depreciation.

Required -

a. Calculate the NPV of the project using nominal values. Argue the answer.

b. Repeat the calculation using real values. Argue the answer.

Reference no: EM132994053

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