Question

Hewlett Packard is considering an investment project that requires an initial investment of $20 million. The investment will generate $10 million at the end of each year for 3 years if there is no inflation. A financial analyst determines that the project will have a nominal discount rate of 17.35%. The analyst also forecasts an inflation rate of 7%

(A) What is the Real Rate ____________9.67%_____________ (The answer is 9.67, I just could not figure out Part B)

(B) What is the net present value of the investment project? _____________________ (Example of answer format: $1000.00 or 1000.00)

Answer 1

Answer to Part B:

Initial Investment = -$20,000,000
Annual Cash Flow = $10,000,000
Real Interest Rate = 9.67%
Life of Project = 3 years

NPV = -$20,000,000 + $10,000,000/1.0967 + $10,000,000/1.0967^2 + $10,000,000/1.0967^3
NPV = -$20,000,000 + $10,000,000 * (1 - (1/1.0967)^3) / 0.0967
NPV = -$20,000,000 + $25,013,711.59
NPV = $5,013,711.59

Net present value of the investment project is $5,013,711.59