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

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.
Figures in $
Initial Investment
Sales in Year 1
Costs in Year 1
Inflation
Working Capital (% of sales-following yr)
Life of the Project
Taxes
Nominal discount rate
Real Discount rate
Salvage Value of Plant & Equipment
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