ENG106W12_HW9-solution

ENG106W12_HW9-solution - ENG 106 Homework #9 Solutions Due:...

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1 ENG 106 Homework #9 Solutions Winter 2012 Due: Wed, Mar 14, 3 pm, HW box 9.X The J.F. Manning Metal Company is considering the purchase of a new milling machine during year zero. The machine’s base price is $135,000, and it will cost another $15,000 to modify the machine for special use by the firm, resulting in a $150,000 cost base for depreciation. The machine falls into the MACRS seven year property class and will be sold after three years for $80,000 (CD). 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) per year in before-tax operating costs – mainly labor. The firm’s marginal tax rate is 40%, and this rate is expected to remain unchanged over the project’s duration. The firm’s market interest rate is 20% (MARR). Assume the general inflation rate f = 6% would affect all cash flows that change with inflation, so ignore the item-specific inflation rates. Assume the $80k salvage is in today’s (constant) dollars, and that the actual-dollar value at time of sale would be higher due to inflation. Recall that MARR = MARR’ + f + MARR’ * f. a) First set up the cash flow table in constant dollars, i.e., ignoring inflation. Calculate the PW of the project using MARR’. b) Redo the analysis, this time taking inflation into account by using actual dollars in the table 1 . Calculate the PW with the market MARR. c) Explain why the present worths are different. 1
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This note was uploaded on 04/03/2012 for the course ENGIN 106 taught by Professor Fizali during the Spring '12 term at Laney College.

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ENG106W12_HW9-solution - ENG 106 Homework #9 Solutions Due:...

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