Chicks with Kicks has requested another report in addition to the NPV report you completed in Exercise 20-32. Details about the machine investment are as follows:

Cost of new machine ................................ $150,000.00
CCA rate ................................................................... 25%
Disposal value ............................................. $11,000.00
Useful life .......................................................... 3 years

The expected improvements from the new machine would allow for an increase in membership fees. The CFO expects cash flows from the investment in the first three years to be $89,000, $91,000, and $101 ,000. The company is subject to a 40% tax rate and has a required rate of return of 15% for all investment proje cts.

1. The current required rate of return of 15% per year does not include an adjustment of 2% for inflation. Calculate the real rate of return.

2. The CFO has asked you to recalculate the NPV of the investment using the real rate of return.