Inflation in project analysis

It is often easy to overlook the impact of inflation on the net present value of the project. Not incorporating the impact of inflation in determining the

value of the cash flows of the project can result in erroneous estimations.

Consider the following scenario:

Extensive Enterprise Inc. is considering opening a new division to make iWidgets that it expects to sell at a price of $$13,575$ each in the

first year of the project. The company expects the cost of producing each iWidget to be $$6,700$ in the first year; however, it expects the

selling price and cost per iWidget to increase by $4\%$ each year.

Based on this information, complete the following table:

Selling price in year $4$:

Cost per unit in year $4$ :

If a company does not take inflation into account when analyzing a project, the expected net present value $($NPV$)$ of the project will typically be

$\_$ than the true NPV of the project.