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CSC is evaluating a new project to produce encapsulators. The initial investment in plant

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CSC is evaluating a new project to produce encapsulators. The initial investment in plant;and equipment is $500,000. Sales of encapsulators in year 1 are forecasted at $200,000 and;costs at $100,000. Both are expected to increase by 10% a year in line with inflation. Profits;are taxed at 35%. Working capital in each year consists of inventories of raw materials and;is forecasted at 20% of sales in the following year.;The project will last five years and the equipment at the end of this period will have no;further value. For tax purposes the equipment can be depreciated straight-line over these;five years. If the nominal discount rate is 15%, show that the net present value of the project;is the same whether calculated using real cash flows or nominal flows.

 

Paper#32187 | Written in 18-Jul-2015

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