An investment project has the following cash flow: C: Cost, I: Income Consider e

Question

An investment project has the following cash flow:

C: Cost, I: Income

Consider escalation rate of 10% for the costs, escalation rate of 12% for incomes and inflation rate of 8%

1) Calculate the ROR for escalated dollar and constant dollar cash flow of this investment project.
2) Calculate NPV for escalated dollar and constant dollar cash flow considering 14% escalated dollar minimum rate of return

Note: To calculate the constant dollar NPV, first you need to calculate constant dollar minimum rate of return.

Please, explain your work in detail including all the required equations and calculations.

C0=$80,000 C1=$60,000 I2=$50,000 I3=$50,000 I4=$50,000 I5=$50,000 I6=$50,000 0 1 2 3 4 5 6

Explanation / Answer

(1)

(2)

Thus, required NPV is $ 43,923

ROR for constant dollar cash flow: Years 0 1 2 3 4 5 6 Cost -80000 -60000 Income 50000 50000 50000 50000 50000 Cash flow -80000 -60000 50000 50000 50000 50000 50000 ROR =IRR(D6:J6,0.1) 18% ROR for esclated dollar cash flow: Years 0 1 2 3 4 5 6 Cost -80000 -60000 cost esclation rate 10% 10% 50000 50000 50000 50000 50000 1 1.1 Dollar esclated cost -80000 -66000 Income 50000 50000 50000 50000 50000 Esclation rate 12% 12% 12% 12% 12% 1.254 1.405 1.574 1.762 1.974 Esclated income 62,720 70,246 78,676 88,117 98,691 Inflation rate 8% 8% 8% 8% 8% 8% 8% 1 0.926 0.857 0.794 0.735 0.681 0.630 Esclated dollar cash flow -80000 -61111.111          53,772          55,764          57,829          59,971      62,192 ROR =IRR(D24:J24,0.1) 23% ROR for esclated dollar 23% ROR for constant dollar 18%

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