Determine the project cash flows in actual dollars

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Reference no: EM131516964

The J.F. Manning Metal Co. is considering the purchase of a new milling machine during year 0. The machine’s base price is $180,000, and it will cost another $20,000 to modify it for special use by the firm. This results in a $200,000 cost base for capital cost allowance. The machine falls into CCA class 43 (d = 30%). The machine will be sold after 3 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) 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. However, the company expects labor costs to increase at an annual rate of 5%, and the working capital requirement to grown at an annual rate of 8% due to inflation. The salvage value 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.

Reference no: EM131516964

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