Chapter 16, Problem 58P

Pensacola Cablevision Company provides television cable service to two counties in the Florida panhandle. The firm’s management is considering the construction of a new satellite dish in December of 20x0. The new antenna would improve reception and the service provided to customers. The dish antenna and associated equipment will cost $200,000 to purchase and install. The company’s old equipment, which is fully depreciated, can be sold now for $20,000. The company president expects the firm’s improved capabilities to result in additional revenue of $80,000 per year during the dish’s useful life of seven years. The incremental operating expenses associated with the new equipment are projected to be $10,000 per year. These incremental revenues and expenses are in real dollars.

The new satellite dish will be depreciated under the MACRS depreciation schedule for the 5-year property class. The company’s tax rate is 40 percent.

Pensacola Cablevision’s president expects the real rate of interest in the economy to remain stable at 10 percent. She expects the inflation rate, currently running at 20 percent, to remain unchanged.

Required:

1. 1. Compute the price index for each year from 20x1 through 20x7, using 1.0000 as the index for 20x0.
2. 2. Prepare a schedule of after-tax cash flows measured in real dollars.
3. 3. Compute the net present value of the proposed new satellite dish using cash flows measured in real dollars. Use a real discount rate equal to the real interest rate.