Question

Consider the following cash flows on two mutually exclusive projects:

Year	Project A	Project B
0	67000	82000
1	47000	46000
2	42000	55000
3	37000	58000

The cash flows of Project A are expressed in real terms while those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 10 percent and the inflation rate is 2 percent.
  
Calculate the NPV for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
  

	NPV
Project A	$
Project B	$

Answer 1

Note: Real cash flow will be discounted at real rate and nominal cash flow will be discounted using nominal rate
we know that nominal rate = (1+Real rate)*(1+inflation rate)
therefore real rate =			=(1+nominal rate)/(1+inflation rate)-1
	Real rate =		=(1+10%)/(1+2%)-1
			7.84%
computation of NPV project A
i	ii	iii	iv=ii*iii
Year	Project A	PVIF @ 7.84%	present value
0	-67000	1.0000	(67,000.00)
1	47000	0.9273	43,581.82
2	42000	0.8598	36,113.06
3	37000	0.7973	29,500.15
	NPV=		42,195.02
i	ii	iii	iv=ii*iii
Year	Project B	PVIF @ 10%	present value
0	-82000	1.0000	(82,000.00)
1	46000	0.9091	41,818.18
2	55000	0.8264	45,454.55
3	58000	0.7513	43,576.26
	NPV=		48,848.99
Therefore -
Project A NPV =		42,195.02
Project B NPV =		48,848.99