Present value of investment under period of rising inflation

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Reference no: EM131010140

You are interested in an investment project that costs $10,500 initially. The investment has a 5- year horizon and promises future end-of-year cash inflows of $5,000, $4,000, $2,500, $3,500 and $2,000 respectively. Your current cost of capital is 8% per year. However, the Fed has stated that inflation may rise by 1% or may fall by the same amount. Assume a direct positive impact of inflation on the prevailing rates and answer the following questions. a What is the net present value (NPV) of the investment under the current required rate of return? b What is the net present value (NPV) of the investment under a period of rising inflation? c What is the net present value (NPV) of the investment under a period of falling inflation? d From your answers in a,b and c what relationship do you see emerge between changes in inflation and the performance of the cash flow (through its NPV)?

Reference no: EM131010140

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