# ESCALATION AND INFLATIONSOLVE PROBLEM:Use your problem 3-21 or 3-22 in HWK7 (solved HWK7 is availabl

ESCALATION AND INFLATIONSOLVE PROBLEM:Use your problem 3-21 or 3-22 in HWK7 (solved HWK7 is available to download fromANGEL)1. Calculate the new escalated internal rate of return of the whole project afteran Escalation of 6% of the Product Price, and a 10% escalation of the OperatingCosts. Compare the internal rate of return after escalation vs. the internal rate ofreturn before escalation.2. Assuming an interest* rate of 12%, calculate the NPV of the cash flow usingescalated values3. Keeping the escalated values from 1. Assume a 5% inflation and determine thenew constant dollar cash flow and re-calculate the constant dollar internalrate of return of this project. (compare your answer with question 1)4. Assuming an interest* rate of 12%, a 5% inflation rate, and using the constantdollar cash flow from question 3, calculate the equivalent constant interest rate(see equation 5-1 in your book and example 5-2 in class notes) to calculate theNPV of the project.*escalated interest rate

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