Contemporary Engineering Economics 6th Edition by Chan Park

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The Land Development Corporation is considering purchasing a bulldozer. The bulldozer will cost $100,000 and will have an estimated salvage value of $30,000 at the end of six years. The asset will generate annual before-tax revenues of $80,000 over the next six years. The asset is classified as a five-year MACRS property. The marginal tax rate is 40%, and the firm's market interest rate is known to be 18%. All dollar figures represent constant dollars at time 0 and are responsive to the general inflation rate
.
(a) With
, compute the after-tax cash flows in actual dollars.
(b) Determine the real rate of return of this project on an after-tax basis.
(c) Suppose that the initial cost of the project will be financed through a local bank at an interest rate of 12% with an annual payment of $24,323 over six years. With this additional condition, answer part (a) again.
(d) In part (a), determine the present-value loss due to inflation.
(e) In part (c), determine how much the project has to generate in additional before-tax annual revenue in actual dollars (equal amount) to make up the loss due to inflation.