You are interested in an investment project that costs $43,875 initially. The

investment has a 5​-year

horizon and promises future​ end-of-year cash inflows of $11,700​, $12,285​, $11,115​, $8,775​, and $8,190​,

respectively. Your current opportunity cost is 6.34% per year.​ However, the Fed has stated that inflation may rise by1.5% or may fall by the same amount over the next 5 years.

Assume a direct positive impact of inflation on the prevailing rates​ (Fisher effect) and answer the following​ questions: (Assume that inflation has an impact on the opportunity​ cost, but that cash flows are contractually fixed and are not affected by​ inflation.)

a. What is the net present value​ (NPV) of the investment under the current required rate of​ return?

b. What is the net present value​ (NPV) of the investment under a period of rising​ inflation?

c. What is the net present value​ (NPV) of the investment under a period of falling​ inflation?

d. From your answers in (a​), (b​),and (c​),what relationship do you see emerge between changes in inflation and asset​ valuation?

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