A company is considering investing in a project which requires an initial investment
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A company is considering investing in a project which requires an initial investment

A company is considering investing in a project which requires an initial investment of £150,000. The cash inflows during years 1–3 are expected to be £55,000 per annum. The company’s monetary cost of capital is 10 per cent and inflation is expected to be 6 per cent during the life of the project.

Requirements

(i) Calculate the NPV of the project using the real rate of return as the discount rate.

(ii) Calculate the NPV of the project using the monetary cost of capital as the discount rate.

Hint
Accounts & Financei.) Net present value (NPV) can be defined as the difference existing between present value of the cash inflows to those of the cash outflows over a given period of time. Net present value is used in financial management to project the profitability of a project, it considers the inflows, outflows, period of time and the risks involved and the payback period. NPV= Rt/(1+i)^t....

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