Question: Consider a project starting in year t = 0 and lasting until year t = 3. The inflation is known to remain 10% per year

Consider a project starting in year t = 0 and lasting until year t = 3. The inflation is known to remain 10% per year during the entire project horizon. In current (nominal) prices, the net benefits for each of the four years are: NB0 = –20, NB1 = 15, NB2 = 5, NB3 = –3. The nominal discount rate is 15%.

a. Find the NPV using the nominal net benefits and nominal discount rate.

b. Calculate the net benefits for each of the four years in real terms (in period 0 prices). Calculate the real (i.e. inflation adjusted) discount rate.

c. Find the NPV using the real net benefits and the real discount rate calculated in b). Compare with the result in a).

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a Period Net Benefits PVF 15 Present Value 0 2000 1000 2000 1 1500 0870 1304 2 500 0756 ... View full answer

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