Project A has forecasted an outlay of $$200,000$ for the equipment and an additional

$$40,000$ for installation. The firm will see an increase of $$25,000$ in inventories

immediately to undertake this project, but they will also see an immediate increase in

accounts payable of $$5,000.$ There will be a return of the net working capital change at the end of the fourth year. Also, at the end of the fourth year the firm will sell the asset for a salvage value of $$25,000.$ The firm has a variable cost of operations that is

equivalent to $60\%$ of sales, a sales price of $$2\mathrm{.}00$ with no assumed annual inflation, and a tax rate of $26\%.$ Depreciation will fall into the $3-$year MACRS class. Unit sales are forecast to be $100,000$; $110,000$; $100,000$; and $100,000$ respectively for the first four

years.

Project B has forecasted an outlay of $$176,000$ for the equipment and an additional

$$40,000$ for installation. The firm will see an increase of $$25,000$ in inventories

immediately to undertake this project, but they will also see an immediate increase in

accounts payable of $$25,000.$ There will be a return of the net working capital change at the end of the fourth year. Also, at the end of the fourth year the firm will sell the asset for a salvage value of $$45,000.$ The firm has a variable cost of operations that is equivalent to $70\%$ of sales, a sales price of $$2\mathrm{.}50$ with no assumed annual inflation, and a tax rate of $26\%.$ Depreciation will fall into the $3-$year MACRS class. Unit sales are forecast to be $75,000$; $90,000$; $90,000$; and $100,000$ respectively for the first four years.

Please assume that $(1)$ you will use your cash flow statement background and

understanding, $(2)$ the original financial information provided for these two

mutually exclusive projects, and $(3)$ ignoring any possible managerial options

from question #$3.$ Will your project decision change if inflation in prices is $5\%$ per

year for each of the four years? Assume, for example, that the given $$2\mathrm{.}00$ price

in project A is at time $0,$ so the first year the price would be $5\%$ higher. Provide

quantitative analysis and explanation. Sales will fall $3\%$ per year for both

projects in this scenario.