The following information is available about an investment opportunity. Investment will occur at time 0 and sales
Question:
a. Prepare a spreadsheet to estimate the projects annual ATCFs.
b. Calculate the investments internal rate of return and its NPV.
c. How do your answers to questions (a) and (b) change when you assume a uniform inflation rate of 8 percent a year over the next 10 years? (Use the following equation to calculate the nominal discount rate: i n = (1 + i r) (1 + p) 1, where i n is the nominal discount rate, i r is the real discount rate, and p is expected inflation.)
d. How do you explain the fact that inflation causes the internal rate of return to increase and the NPV to decrease?
e. Does inflation make this investment more attractive or less attractive? Why?
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...
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