Contemporary Engineering Economics 6th Edition by Chan Park

تمرين 23

The J. F. Manning Metal Co. is considering the purchase of a new milling machine during year 0. The machine's base price is $135,000, and it will cost another $15,000 to modify it for special use. This results in a $150,000 cost base for depreciation. The machine falls into the MACRS seven-year property class. The machine will be sold after three years for $80,000 (actual dollars). Use of the machine will require an increase in net working capital (inventory) of $10,000 at the beginning of the project year. The machine will have no effect on revenues, but it is expected to save the firm $80,000 (today's dollars) per0 year in before-tax operating costs, mainly for labor. The firm's marginal tax rate is 40%, and this rate is expected to remain unchanged over the duration of the project. However, the company expects that the labor cost will increase at an annual rate of 5% but that the working-capital requirement will grow at an annual rate of 8% (caused by inflation). The selling price of the milling machine is not affected by inflation. The general inflation rate is estimated to be 6% per year over the project period. The firm's market interest rate is 20%.
(a) Determine the project cash flows in actual dollars.
(b) Determine the project cash flows in constant (time-0) dollars.
(c) Is this project acceptable