A company manufactures mother boards for various computer manufacturers. Design changes in computer processors, which are expected to increase sales, will require changes in their manufacturing operations. The cost basis of new equipment required is $500,000 (MACRS three-year property class). Increased annual revenues, in year zero dollars, are estimated to be $800,000. Increased annual expenses, in year zero dollars are estimated to be $575,000. The estimated market value of equipment in actual dollars at the end of the four-year analysis period is $80,000. General price inflation is estimated at 4.9% per year; the total increase rate of annual revenues is 2.5%, and for annual expenses it is 5.6%, the after-tax MARR (in market terms) is 10% per year (im) and f = 40%.
a. Based on after-tax, actual-dollar analysis, what is the maximum amount that the company can afford to spend on the total project (i.e. changing the manufacturing operations)? Use the PW method of analysis.
b. Develop the ACTF in real dollars.