{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

fm12 8 - 12-6 a Sales = 1,000(\$138 Cost = 1,000(\$105 Net...

This preview shows page 1. Sign up to view the full content.

12-6 a. Sales = 1,000(\$138) \$138,000 Cost = 1,000(\$105) 105,000 Net before tax \$ 33,000 Taxes (34%) 11,220 Net after tax \$ 21,780 Not considering inflation, NPV is -\$4,800. This value is calculated as -\$150,000 + 15 . 0 780 , 21 \$ = -\$4,800. Considering inflation, the real cost of capital is calculated as follows: (1 + r r )(1 + i) = 1.15 (1 + r r )(1.06) = 1.15 r r = 0.0849. Thus, the NPV considering inflation is calculated as -\$150,000 + 0849 . 0 780 , 21 \$ = \$106,537. After adjusting for expected inflation, we see that the project has a positive NPV and should be accepted. This demonstrates the bias that inflation can induce into the capital budgeting process: Inflation is already reflected in the denominator (the cost of capital), so it must also be reflected in the numerator.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern