[Chimymy]

Please is nominal cost NPV and real cost IRR?

[Chimymy]

Good Morning Sir,Can you guide on a lecture to watch so I can get the distinction between a real and a nominal approach to the evaluation of an investment project under inflation as the one thing i picked in the above is one is inflated while the other is not

[Chimymy]

Thank you so much Sir your response has helped me figure out the calculations am grateful. I would have pasted it here but not sure if you would like me to. Best Regards.

[Chimymy]

Good Morning Sir, Please see below the question.
The directors of M &R plc wish to expand the company’s operations. However, they are not prepared to borrow at the present time to finance capital investment. The directors have therefore decided to use the company’s cash resources for the expansion programme.
Three possible investment opportunities have been identified. Only £600,000 is available in cash and the directors intend to limit the capital expenditure over the next 12 months to this amount. The projects are not divisible and none of them can be postponed. The following cash flows do not allow for inflation, which is expected
to be 12% per annum constant for the foreseeable future.
Expected net cash flows (including residual values)
Initial investment Year 1 Year 2 Year 3
Project £ £ £ £
A -310,000 96,000 113,000 210,000
B -115,000 45,000 42,000 47,000
C -36,000 -41,000 -23,000 127,000

The company’s shareholders currently require a return of 16 per cent nominal on their investment. Ignore taxation.

Required

a) Explain how inflation affects the rate of return required on an investment project, and the distinction between a real and a nominal approach to the evaluation of an investment project under inflation.

b)
I. Calculate the expected net present value and profitability indexes of the three projects; and
II. Comment on which project(s) should be chosen for the investment, assuming the company can invest surplus cash in the money market at 10 per cent.
(15 marks)
c) Discuss whether the company’s decision not to borrow, thereby limiting investment expenditure, is in the best interests of its shareholders.

[Chimymy]

I typed again as they appeared muddlled up. Three projects A,B,C.

A B C
0 310,000 – 115,000 – 36,000
1 96000(1.12) 45000(1.12)2 -41,000(1.12)3
2 113,000(1.12) 42000(1.12)2 – 23,000(1.12)3
3 210,000 (1.12) 47,000(1.12)2 127,000 (1.12)3

The 2’s and 3’s outside the bracket represent the square and cube value of the interest rate it shows properly on microsoft word but when i transfered it here it appears as normal numbers or do I just multiply the the yearly outflows by the interest rate without multiplying by the square and cube values to arrive at the actual cash flows.

[Chimymy]

Good Evening Sir, I have questions concerning a question on Capital Rationing I am trying to solve
!. What odes it mean when its said the Cashflow does not allow for inflation yet the rate of inflation is mentioned(12%)
2. When some of the Cashflows have a negative sign what does the negative sign mean and should it be ignored in the calculations
3. When there is nominal rate expected by company shareholders does it represent the project investment rate?

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