A company is considering a new project

 Project life is 3 years

 Investment for new equipment will cost $100,000
o Company will finance $20,000 themselves
o Company will borrow $80,000 at the market interest rate of 10%
(annual rate compounded annually) to be paid in 3 equal payments
 Equipment is depreciated as a 7-year MACRS asset
 Salvage value at the end of 3 years is $26,000 in today’s dollars
 Additional revenues of $90,000 per year (constant dollars) are anticipated
 Additional O&M costs of $12,000 per year (actual dollars) are anticipated
 Firm’s marginal tax rate is 21%
 Initial Working Capital investment of $14,000 is required, and following
years will require additional Working Capital at the general inflation rate.
Working Capital will be recovered at the end of the project.
 General inflation rate is 4%

Questions:
1. What is the NPW of the project? Solve using actual dollar and constant dollar
analysis.
2. The IRR using actual dollars is closest to what value?
a) 20%
b) 50%
c) 88%
3. Should you accept the project?