Contemporary Engineering Economics 6th Edition by Chan Park

تمرين 17

Gentry Machines, Inc., has just received a special job order from one of its clients. The following financial data have been collected:
• This two-year project requires the purchase of special-purpose equipment for $55,000. The equipment falls into the MACRS five-year class.
• The machine will be sold for $27,000 (today's dollars) at the end of two years.
• The project will bring in additional annual revenue of $114,000 (actual dollars), but it is expected to incur an additional annual operating cost of $53,800 (today's dollars).
• The project requires an investment in working capital in the amount of $12,000 at n =0. In each subsequent year, additional working capital needs to be provided at the general inflation rate. Any investment in working capital will be recovered after the project is terminated.
• To purchase the equipment, the firm expects to borrow $50,000 at 10% over a two-year period. The remaining $5,000 will be taken from the firm's retained earnings. The firm will make equal annual payments of $28,810 (actual dollars) to pay off the loan.
• The firm expects a general inflation of 5% per year during the project period. The firm's marginal tax rate is 40%, and its market interest rate is 18%.
(a) Compute the after-tax cash flows in actual dollars.
(b) What is the equivalent present value of this amount at time 0