This is an investment opportunity and investment will occur at time 0 and sales commence at time 1.

Initial cost: $28M

Unit sales: 400,000

This year's selling price per unit: $60

This year's variable cost per unit: $42

Life expectancy: 8 yrs

Salvage value: $0

Depreciation: straight line

Tax rate: 37%

Nominal discount rate: 10%

Real discount rate: 10%

Inflation rate: 0%

1. Prepare spreadsheet to estimate the projects annual after tax cash flows

2. What is investment's internal rate of return & NPV?

3. How do your answers to 1 & 2 change when you assume a uniform inflation rate of 8% a year over the past 10 yrs? *Use this equation for nominal discount rate: in=(1+ir)(1+p)-1, where 'in' is the nominal discount rate, 'ir' is the real discount rate, & 'p' is expected inflation.

4. How can the fact that inflation causes the internal rate of return to increase & the net present value to decrease be explained?

5. Is inflation making this investment more attractive or less and why?