The J. F. Manning Metal Co. is considering the purchase of a new milling machine during year 0. The machine’s base price is $135,000, and it will cost another $15,000 to modify it for special use. This results in a $150,000 cost base for depreciation. The machine can be assumed to have a life of 10 years after which it is worth only scrap value; however, the company will sell the machine after three years for a guaranteed $80,000 (actual (future) dollars). The machine will have no effect on revenues, but is expected to save the firm $80,000 (today’s dollars) per year in before-tax operating costs, mainly labour. The firm’s marginal tax rate is 30%, and this rate is expected to remain unchanged for the duration of the project. However, the company expects that the labour cost will increase at an annual rate of 5%. The selling price of the milling machine is not affected by inflation. The general inflation rate is estimated to be 6% per year over the project period. The firm’s inflation-adjusted minimum attractive rate of return on investments is 20%. Assume that tax is paid in the year after the liability is incurred. Ignore the effect of tax on any capital gain or loss.

(a) Determine the project cash flows in actual dollars.

(b) Determine the project cash flows in constant (time = 0) dollars.

(c) Is this project acceptable? Show your analysis and reasoning.