Hugh Health Product Corporation is considering the purchase of a computer to control plant packaging for a spectrum of health products. The following data have been collected:First cost = $130,000 to be borrowed at 9% interest, where only interest is paid each year and the principal is due in a lump sum at the end of year 2.Economic service life =six yearsEstimated selling price in year-0 dollars = $20,000.Depreciation method = five-year MACRS property.Marginal income-tax rate= 40% (remains constant).Annual revenue= $155,000 (today's dollars).Annual expense (not including depreciation and interest)= $88,000 (today's dollars).Market interest rate = 18%.(a) An average general inflation rate of 5%, affecting all revenues, expenses, and the salvage value, is expected during the project period. Determine the cash flows in actual dollars.(b) Compute the net present worth of the project under inflation.(c) Compute the net-present-worth loss (or gain) due to inflation.(d) Compute the present-worth loss (or gain) due to borrowing.

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 8P

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Hugh Health Product Corporation is considering the purchase of a computer to control plant packaging for a spectrum of health products. The following data have been collected:

First cost = $130,000 to be borrowed at 9% interest, where only interest is paid each year and the principal is due in a lump sum at the end of year 2.
Economic service life =six years
Estimated selling price in year-0 dollars = $20,000.
Depreciation method = five-year MACRS property.
Marginal income-tax rate= 40% (remains constant).
Annual revenue= $155,000 (today's dollars).
Annual expense (not including depreciation and interest)= $88,000 (today's dollars).
Market interest rate = 18%.
(a) An average general inflation rate of 5%, affecting all revenues, expenses, and the salvage value, is expected during the project period. Determine the cash flows in actual dollars.
(b) Compute the net present worth of the project under inflation.
(c) Compute the net-present-worth loss (or gain) due to inflation.
(d) Compute the present-worth loss (or gain) due to borrowing.

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