Question

Study Appendix 11. MLK Elementary School is considering the purchase of a photocopying machine for $7,000 on December 31, 20X0. The machine will have a useful life of 5 years and no residual value. The cash operating savings are expected to be $2,000 annually, measured in 20X0 dollars. The required rate is 14%, which includes an element attributable to anticipated inflation of 6%. (Remember that the school district pays no income taxes.)
Use the 14% required rate for numbers 1 and 2:
1. Compute the NPV of the project without adjusting the cash operating savings for inflation.
2. Repeat number 1, adjusting the cash operating savings upward in accordance with the 6% inflation rate.
3. Compare your results in numbers 1 and 2. What generalization seems applicable about the analysis of inflation in capital budgeting?



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  • CreatedNovember 19, 2014
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