Matollows and 250 shillings in the followingyear. After that, dividends are expected to grow at constant 5% per year. If the required rate of return is10%, what price should investors pay for such shares today?4. Suppose a firm is considering a project that would require an initial cash outlay of 15 million shillings andexpected to generate shs 4.5 million each year for the next 4 years. The firm assumes that the pricesand costs increases at the same rate and that the required rate of return expressed in nominal terms is14%. The firm also practices a policy whereby cash flows are stated at the prices of period zero. Theinflation rate is expected to be 5%.(a)Outline two ways in which the effects that inflation has on the acceptability of investment projectscould be considered.(b)Using the NPV technique, is the project worth taking? What have you learned from your analysis asfar as treating inflation in investment analysis is concerned?30/2021 4:39:41 PMPage 1 of 2

Given , Initial Cashflow : 15 millionCash Inflow : 4.5 millionTime : 4 yearsNominal Interest rate :…

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year. After that, dividend 10%, what price should

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.7P

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Question

100%

Matollows and 250 shillings in the following
year. After that, dividends are expected to grow at constant 5% per year. If the required rate of return is
10%, what price should investors pay for such shares today?
4. Suppose a firm is considering a project that would require an initial cash outlay of 15 million shillings and
expected to generate shs 4.5 million each year for the next 4 years. The firm assumes that the prices
and costs increases at the same rate and that the required rate of return expressed in nominal terms is
14%. The firm also practices a policy whereby cash flows are stated at the prices of period zero. The
inflation rate is expected to be 5%.
(a)Outline two ways in which the effects that inflation has on the acceptability of investment projects
could be considered.
(b)Using the NPV technique, is the project worth taking? What have you learned from your analysis as
far as treating inflation in investment analysis is concerned?
30/2021 4:39:41 PM
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