1. Calculate the projects cash flows using the data in Exhibit 2

2. Why is it important to take into account the effect of inflation in forecasting the cash flows?

Exhibit 2: The data Joan Hamilton plans to use in the calculation of the cash flows for the project and in the evaluation of its profitability The Machinery's Invoice Price Shipping Charges Installation Cost Depreciable Basis $280,000 5,000 15,000 $300,000 MACRS Depreciation Rates: Year 1 33% Year 2 Year 3 45% 15% Year 4 7% Salvage Value: $40,000 Annual revenue and cost estimates (assume 3% inflation rate): Year 2 Year 1 1,500 $250.00 Year 3 1,500 Year 4 1,500 Units 1,500 Unit Price 150.00 Unit Cost Sales 375,000 225,000 Costs Net Operating Working Capital (NOWC) Requirement: Year 0 Year 1 Year 2 Year 3 Year 4 Sales $375,000 NOWC (15% of sales) $56,250 CF due to NOWC (56,250) This exhibit shows the data needed to calculate the cash flows for this project. The new production system has a useful life of 4 years, a salvage value of $40,000 and falls in MACRS 3-year class. Annual revenue and cost estimates are presented in the middle of the exhibit. The system is expected to generate sales of 1,500 units per year, with a unit price of $250 and unit cost of $150. VEC's net operating working capital requirement, which is shown at the bottom of the exhibit, is 15% of total sales