Consider the projects after tax cash flow and the expected annual general inflation rate during the project period:
End of Year Expected cash flow General Inflation Rate
0 $(45,000.00)
1 $26,000.00 6.50%
2 $26,000.00 7.70%
3 $26,000.00 8.10%
First we have to determine the general inflation rate over the project period, then we need to convert the cash flows into actual dollars into equivelant constant dollars with year zero as the base year. Then if the annual inflation free interest rate is 5%, what is the present worth of the cash flow?