If an investment costing $2000 is expected to generate real cash flows of $900 p.a.for three years,prices are expected to increase at a rate of 10% p.a. ,and the nominal cost of capital is 15%,what is the net present value of the investment?
A)$520.59
B)$740.79
C)$471.97
D)$389.79

Question

Quizplus · Accepted Answer

The NPV is calculated by discounting the real cash flows at the real cost of capital. The real cost of capital is approximately 4.55% (calculated using the Fisher equation: (1+nominal rate)/(1+inflation rate) - 1). Discounting $900 for three years at 4.55% and subtracting the initial investment of $2000 gives an NPV of approximately $471.97.

If an Investment Costing $2000 Is Expected to Generate Real