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(Identifying nominal numbers) A company is considering an investment that would cost $25,000 and return a...

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Finance

(Identifying nominal numbers) A company isconsidering an investment that would cost $25,000 and return a netafter-tax cash flow of $8,000 per year in each of the next fiveyears.

a. Assume these figures include inflation forecasts. Whatnumbers should enter the capital budgeting analysis?

b. Now assume the above figures do not includeinflation, forecast to be 6% per year. What numbers should enterthe capital budgeting analysis?

c. Why must the cash flows used in capital budgeting contain theimpact of inflation?

d. What would be the bias if the impact of inflation were leftout

Answer & Explanation Solved by verified expert
3.8 Ratings (732 Votes)
a The numbers that should enter the CB anlysis are the yearly cash flows as given below 0 1 2 3 4 5 Cash flows 25000 8000 8000    See Answer
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