Cash flows in real terms
You are a financial analyst at Wigit, Inc., and you are considering two mutually exclusive projects. Unfortunately, the figures for project 1 are in nominal terms and the figures for project 2 are in real terms. The nominal discount rate for both projects is 17%, and inflation is projected to be 3%.
Project 1 Project 2
0 (100,000) (90,000)
1 30,000 25,000
2 60,000 55,000
3 75,000 80,000
a)Determine which project to choose.
b)You are troubled about the cash flows in real terms. You are concerned that there maybe a problem in determining the total cash flows in real terms and the depreciation tax shield. What is it that has you concerned?