Inflation and NPV
a) Hewlett Packard is considering an investment project that requires an initial investment of $50 million. The investment will generate $15 million at the end of each year for 4 years if there is no inflation. A financial analyst determines that the project will have a nominal discount rate of %15. The analyst also forecasts an inflation rate 7%. What is the real rate?
b) Hewlett Packard is considering an investment project that requires an initial investment of $50 million. The investment will generate $15 million at the end of each year for 4 years if there is no inflation. A financial analyst determines that the project will have a nominal discount rate of 15%. The analyst also forecasts an inflation rate 7%. What is the net present value of the investment project?
a.
Real Rate = Nominal Rate - Inflation Rate
Real Rate = 0.15 - 0.07
Real Rate = 8.00%
b.
Initial Investment = $50 million
NPV = -$7,175,325.56
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