(a) Jireh Housing Limited is a UK based property developer and is considering a project in Ghana which would require an outlay of £1.6 million at the outset. The money cash flows receivable from sales will depend on the specific inflation rate for Jireh property. This is anticipated to be 4% per annum. Cash outflows consist of four elements: labour, materials, overheads, and machinery maintenance. Labour costs are expected to increase by 5% per annum, materials by 3%, overheads by 4%, and machinery maintenance by 1%. Jireh’s requires a real rate of return of 16% on projects of this risk class, and anticipates the general rate of inflation to be 2% per annum over the 3-year life of the project. Annual cash flows in present (Time 0) prices are as follows: £m Inflation Sales 3.4 4% Labour 0.8 5% Materials 0.5 3% Overheads 0.05 4% Machinery maintenance 0.01 1% Required: Calculate the NPV of the project using either method (i.e. nominal and real) of adjusting for inflation.
(a) Jireh Housing Limited is a UK based property developer and is considering a project in Ghana which would require an outlay of £1.6 million at the outset. The money cash flows receivable from sales will depend on the specific inflation rate for Jireh property.
This is anticipated to be 4% per annum.
project. Annual cash flows in present (Time 0) prices are as follows:
£m Inflation
Sales 3.4 4%
Labour 0.8 5%
Materials 0.5 3%
Overheads 0.05 4%
Machinery maintenance 0.01 1%
Required:
Calculate the
Step by step
Solved in 4 steps with 3 images