This should be calculated on Excel using Solver, to have an NPV of 0. The reason this is the best method is because the purchase cost impacts the tax expense, as a result of the depreciation tax credit. That means that six total elements of the equation are unknown, but all are related to the original purchase cost. The maximum that Kerry would purchase the machine for, therefore, would be $46,277. If the machine cost more, the net present value would be below zero.

d

0.18

Year

0

1

2

3

4

5

Purchase Cost

-46277.05481

Added Fixed Costs

-2500

-2500

-2500

-2500

-2500

Added VC

-18250

-18250

-18250

-18250

-18250

Added Revenue

54750

54750

54750

54750

54750

Tax on Revenue

-16425

-16425

-16425

-16425

-16425

Dep Exp Credit

-2776.62

-2776.623

-2776.62

-2776.62

-2776.62

Sum of Flows

-46277.05481

14798.38

14798.38

14798.38

14798.38

14798.38

PV

-46277.05481

12541

10627.96

NPV

$ (0.00)

12. a. To calculate nominal cash flows, the inflation rate would not be considered. The discount rate, however, should include...

Thus, the nominal discount rate would be 15% to deliver a real return rate of 10%. This gives the following, based only on nominal cash flows:
Nominal Case

Year

0

1

2

3

4

5

Revision Cost

-170000

Cont. Margin 70,000

70,000

70,000

70,000

70,000

PV

-170000

60869.57

52930.06

46026.14

40022.73

34802.37

NPV

$64,650.86

Nominal delivers an NPV of $64,650.86

b. The real case utilizes inflation-adjusted cash flow figures.

Real Case

Year

0

1

2

3

4

5

Revision Cost

-170000

Cont. Margin 73,500

77,175

81,034

85,085

89,340

PV

-170000

63913.04

58355.39

53281.01

48647.88

44417.63

NPV

$98,614.94

c. It is better to use real cash flows. Real cash flows better reflect the expected future cash flow. If these are expected to rise, they must ten be discounted back to the present day. The real discount rate makes less sense, since the discount rate is supposed to include inflation, as it is already reflective of the time value of money. That said, the real cash flows are the important numbers to use in this type of calculation because they are more accurate.