Based on the increasing theft rate in Sunset Harbor, the Harbor is planning to upgrade its security system. It is a 4 year-period project and will significantly increase Sunset Harbors security level. The financial data is as follows:

• Investment: $45,000
  • 50% debt equity ratio. Loan ($22,500) borrowed at 6% interest.
• Project life: 4 years
• Salvage value: $8,000
  • Year 0 dollars
• Depreciation method: 3-year MACRS
• Income tax rate: 25%
• Annual Saving: $28,000
  • Year 0 dollars
• Annual Expense: $14,000
  • Year 0 dollars
  • Does NOT include depreciation
  • Does NOT include interest
• Market interest rate ( i ): 7%

If the general inflation rate (effects revenues, expenses, salvage value) during the next 4 years is expected to be 2% annually:

1. Develop the income statement for the project.
2. Develop the cash flow statement for the project.

(Hint: Dont forget the Financing Activities)

3. Determine the PW of the project. Is the project economically viable?

Why? [

(Hint: Cash flows in Actual dollars, given market interest rate. Therefore, no need to convert to constant dollars before calculating PW)