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.
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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
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.
Expert Solution
Step by step
Solved in 10 steps with 13 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education