Question

Question 4 (20%) A company is considering launching a new product, below is the after-tax cash flow for the new product project accounting for initial investment, expected sales and the year-by-year inflation rate: Year Expected annual inflation 2 Cash flow in Constant Dollars -$150,000 $33,000 $45,000 $55,000 $45,000 $41,000 3 1.9% 3.0% 2.7% 2.3% 2.1% a) Convert the cash flows from constant dollars (in the value of year 0) into equivalent current dollars with the base year being the present. b) If the annual real interest rate is 5%, what is the present equivalent of the cash flow?

Answer 1

3A a) Current dollar cash flow a year N (1 + infletion in year N) Year Constant & CF Inflation Rate Current dollar Cash Flow 0 -$150,000 - - 150000 33000 1.9% 33627 45 000 46350 55000 2.7% 56485 45000 2.3 % 46.35 41000 201% 41861 6) Present equivalent of Cash flow is computed es follows. Year Constant & CF PV Factor @5% Discounted Constant - 150000 1.0000 - 150000 33000 0.9524 31429.2 45000 0.90to 90815.0 55000 0.8638 47509.0 45000 0.8227 37021.5 41000 0.7835 32123.5 Present value 2$38,892.20 M5