BathGate Group Has Just Completed Its Analysis of a Project

question 63

Essay

BathGate Group has just completed its analysis of a project.The CFO has presented the following information to the Board of Directors:
The initial cost of the project is $15,000.Sales are expected to be 10,000 units in year one and are expected to grow by 5% per year forever.In year one, they expect to sell units for $2 each and foresee no real change in unit price.Variable and fixed costs are zero.
The firm's required rate of return is 8%.The corporate tax rate is 30%.Assume the CCA rate is zero.
a)Calculate the NPV of this project if there is zero inflation forecast.
b)Calculate the NPV of this project if inflation is forecasted to be 2% per year.Assume the required rate of return is nominal at 8%.
c)Calculate the NPV of this project if inflation is forecasted to be 2% per year and the firm requires a real rate of return of 8%.

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