(a) Jireh Housing Limited is a UK based property developer and is considering a project in Ghana which would require an outlay of 1.6 million at the outset. The money cash flows receivable from sales will depend on the specific inflation rate for Jireh property. This is anticipated to be 4% per annum. Cash outflows consist of four elements: labour, materials, overheads, and machinery maintenance. Labour costs are expected to increase by 5% per annum, materials by 3%, overheads by 4%, and machinery maintenance by 1%. Jirehs requires a real rate of return of 16% on projects of this risk class, and anticipates the general rate of inflation to be 2% per annum over the 3-year life of the project.

Annual cash flows in present (Time 0) prices are as follows:

m Inflation

Sales 3.4 4%

Labour 0.8 5%

Materials 0.5 3%

Overheads 0.05 4%

Machinery maintenance 0.01 1%

Required:

1. Calculate the NPV of the project using either method (i.e. nominal and real) of adjusting for inflation.