Question

A project for a barge water transportation of raw materials did not yield estimated savings and is being terminated.The market value of the barge is $14,000 (×$1,000). The project had the following cash flows in actual dollars. The company uses a real interest rate i’ = 15% for this product, and inflation is expected to maintain at a 3% average. The company uses MACRS depreciation and has a combined tax rate is 40%. Estimate the after tax cash actual dollar cash flows to terminate the project at the end of year 3, convert the actual dollar cash flows to real dollars, and compute the net present worth in real dollars. Cash flows are in actual dollar × $1,000.

            Actual $                      O&M   

Year    Init Cost    Savings      Costs          

0          ($20,000)

1                            $15,000     ($10,000)

2                            $15,000     ($10,000)   

3                            $15,000     ($10,000)  

Answer 1