Storm Co is evaluating Project X, which requires an initial investment of $50,000. Expected net cash flows are $20,000 pa for four years at todays prices. However these are expected to rise by 5.5% pa because of inflation. The firms cost of capital is 15%. Find the NPV by:

(a) discounting money cash flows

(b) discounting real cash flows.

The solution can be found in the presentation.

Exercise 4.

A project has the following cash flows before allowing for inflation, i.e. they are stated at their T₀ values.

The company's money discount rate is 15.5%. The general rate of inflation is expected to remain constant at 5%.

Timing Cash Flow

0 (750)

1 330

2 242

3 532

Evaluate the project in terms of:

Real cash flows and real discount rates

Money cash flows and money discount rates