swf is considering a project that is expected to generate real cash flows of $10 million...

swf is considering a project that is expected to generate real cash flows of $10 million at the end of each year for 5 years. the intial outlay/investment required is $25 million. a nominal discount rate of 9.2% is appropriate for the risk level. inflation is 5% 1. you are company's financial analyst. the CFO has asked you to calculate the NPV using a schedule of future nominal cash flows. 2. justify the NPV will remain the same while rearranging for inflation and real cash flows calculations.

Expert Solution

NPV using Nominal Cash Flows				NPV using Real Cash Flows
Years	Real Cash Flows	Nominal CF	PVF @9.25%	Amount	Years	Real Cash Flows	PVF @4.05%	Amount
	A	*B=A(1+Inf)^N**	C	*BC**		A	C	*BC**
Year 0	-25	-25	1.000	-25.00	Year 0	-25	1.000	-25.00
Year 1	10	11	0.915	9.61	Year 1	10	0.961	9.61
Year 2	10	11	0.838	9.24	Year 2	10	0.924	9.24
Year 3	10	12	0.767	8.88	Year 3	10	0.888	8.88
Year 4	10	12	0.702	8.53	Year 4	10	0.853	8.53
Year 5	10	13	0.643	8.20	Year 5	10	0.820	8.20
	NPV			19.46		NPV		19.46

Real Discount Factor = (1+Nominal Discount Factor) / (1+ Inflation) -1

=(1.0925)/(1.05) -1 => 4.05%

NPV is same in both analysis using either type of cash flows.

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jeff jeffy answered 1 year ago

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