Capital budgeting, inflation, taxation. (J. Fellingham, adapted) Sapna Patel is manager of the customer service division of an electrical appliance store. $apna is considering buying a repairing machine that costs $12,000 on December 31, 2007. The machine will last five years, fiapna estimates that the incremental pretax cash savings from using the machine will be

$3,600 annually. The $3,600 is measured at current prices and^will be received at the end of each year. For tax purposes, the machinery qualifies for a capital cost allowance rate of 25%, declining balance. $apna requires a 10% after-tax real rate ofreturn (that is, the rate ofreturn is 10% when all cash flows are denominated in December 31, 2007, dollars). Use the 10%

after-tax real rate of return when answering all four requirements.

Required Treat each of the following cases independently.

1. $apna lives in a world without income taxes and without inflation. What is die net present value ofthe machine in this world?

2. $apna lives in a world without inflation, but there is an income tax rate of 40%. What is the net present value of the machine in this world?

3. There are no income taxes, but the annual inflation rate is 20%. What is the net present value of the machine? The cash savings each year will be increased by a factor equal to the cumulative inflation rate.

4. The annual inflation rate is 20%, and the income tax rate is 40%. What is the net present value of the machine?