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 falls into the MACRS seven-year property class. The machine will be sold after three years for $80,000 (actual dollars). Use of the machine will require an increase in net working capital (inventory) of $10,000 at the beginning of the project year. The machine will have no effect on revenues, but it is expected to save the firm $80,000 (today's dollars) per year in before-tax operating costs, mainly for labor. The firm's marginal tax rate is 40%, and this rate is expected to remain unchanged over the duration of the project. However, the company expects that the labor cost will increase at an annual rate of 59c but that the working-capital requirement will grow at an annual rate of 8% (caused by inflation). 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 market interest rate is 20%.
(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?