# Question

BathGate Group has just completed its analysis of a project. The CFO has presented the following information to the board of directors:

The initial cost of the project is $15,000. Sales are expected to be 10,000 units in year 1 and are expected to grow by 5 percent per year forever. In year 1, we expect to sell units for $3 each and foresee no real change in unit price. Variable and fixed costs are zero.

The firm’s required rate of return is 8 percent. The corporate tax rate is 30 percent. Assume the CCA rate is zero.

a. Calculate the NPV of this project if there is zero inflation forecasted.

b. Calculate the NPV of this project if inflation is forecasted to be 2 percent per year. Assume the required rate of return is nominal.

c. Calculate the NPV of this project if inflation is forecasted to be 2 percent per year, and the firm requires a real rate of return of 8 percent.

The initial cost of the project is $15,000. Sales are expected to be 10,000 units in year 1 and are expected to grow by 5 percent per year forever. In year 1, we expect to sell units for $3 each and foresee no real change in unit price. Variable and fixed costs are zero.

The firm’s required rate of return is 8 percent. The corporate tax rate is 30 percent. Assume the CCA rate is zero.

a. Calculate the NPV of this project if there is zero inflation forecasted.

b. Calculate the NPV of this project if inflation is forecasted to be 2 percent per year. Assume the required rate of return is nominal.

c. Calculate the NPV of this project if inflation is forecasted to be 2 percent per year, and the firm requires a real rate of return of 8 percent.

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