Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 19

Hugh Health Product Corporation is considering purchasing a computer to control plant packaging for a spectrum of health products. The following data have been collected:
• First cost = $120,000 to be borrowed at 9% interest with only interest paid each year and the principal due in a lump sum at end of year 2.
• Economic service life (project life) = 6 years.
• Estimated selling price in year-0 dollars = $15,000.
• Depreciation = five-year MACRS property.
• Marginal income-tax rate = 40% (remains constant).
• Annual revenue = $145,000 (today's dollars).
• Annual expense (not including depreciation and interest) = $82,000 (today's dollars).
• Market interest rate = 18%.
(a) With an average general inflation rate of 5% expected during the project period (which will affect all revenues, expenses, and the salvage value of the computer), determine the cash flows in actual dollars.
(b) Compute the net present value of the project under inflation.
(c) Compute the net present-value loss (gain) due to inflation.
(d) In part (c), how much is the present-value loss (or gain) due to borrowing