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ANALYSIS OF COSTS WITH INFLATION Dunder Mifflin is considering purchasing equipment for quality inspection of one of their finished products. The equipment will cost $

ANALYSIS OF COSTS WITH INFLATION

Dunder Mifflin is considering purchasing equipment for quality inspection of one of their finished products. The equipment will cost $ 150,000 and it is estimated that due to its specialized function it will not have resale value at the end of its useful life. It is estimated that the operating costs and equipment maintenance will be $ 1,000 in the first year and management expects these costs to increase in subsequent years according to the inflation rate. The company estimates that the useful life of the equipment will be 10 years. The equipment qualifies for depreciation purposes as a MACRS property of 5 years. Assume that general inflation during that period will be 3%, the tax rate 35%, and that the inflation-adjusted rate of return is 15% (Market Rate).

Determine:

1) The present value PW and EAW of the costs associated with this purchase in an analysis before taxes.

2) The present value PW and EAW of the costs associated with this purchase in analysis after taxes.

***You must use Excel to solve the problem and please indicate the functions and calculations used.***

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