Project Analysis and Inflation Sony International has an investment opportunity to produce a new HDTV The required investment on January 1 of this year is $175 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the project. The firm is in the 34 percent tax bracket. The price of the product will be $550 per unit, in real terms, and will not change over the life of the project. Labor costs for year 1 will be $16.75 per hour, in real terms, and will increase at 2 percent per year in real terms. Energy costs for year 1 will be $4.35 per physical unit, in real terms, and will increase at 3 percent per year in real terms. The inflation rate is 5 percent per year. Revenues are received and costs are paid at year-end. Refer to the following table for the production schedule:
| Year 1 | Year 2 | Year 3 | Year 4 |
Physical production, in units | 150,000 | 160,000 | 180,000 | 170,000 |
Labor input, in hours | 1,800,000 | 2,000,000 | 2,100,000 | 1,800,000 |
Energy input, physical units | 175,000 | 195,000 | 205,000 | 200,000 |
The real discount rate for Sony is 8 percent. Calculate the NPV of this project.
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