Problem 1

An investment related to developing a new product is estimated to have the following costs and

revenues in "today's" or "time zero" dollars.

-50,000

0

-150,000

1

220,000

-120,000

2

220,000

-120,000

5

a. Evaluate the project escalated dollar ROR if all costs are estimated to escalate at 15% per

year from time zero with income escalating at 10% per year.

b. Make constant dollar ROR analysis of part (a) based on the prediction that the inflation

rate for the next five years will be 3% per year.

c. Calculate the escalated dollar NPV assuming 15% of hurdle rate.