If inflation decrease or increase the annual cost.
Answer to Problem 84P
The rate of return is increased in with inflation method.
Explanation of Solution
Given:
The first cost is
The maintenance cost per year is
The salvage value is
MARR is
Inflation rate is
Calculation:
Calculate the MACRS
Refer the table for MACRS depreciation for personal property.
Substitute
Calculate the depreciation.
Year | MACRS Rate(a) | Before Tax Cash Flow(b) | Depreciation(c) |
Calculate the before and after tax cash flows.
Year | Before tax cash flow |
MACRS Depreciation |
Taxable Income |
Income taxes |
After tax cash flowActual dollars |
Determine the rate of return after tax.
Use trial and error method.
Try
Substitute
Thus, the rate of return after tax without inflation is
Calculate the inflation applied cash flows.
Determine the before tax cash flow for year
Here, f is the inflation rate.
Substitute
Determine the before tax cash flow for year
Substitute
Substitute
Calculate the MACRS Depreciation for year
Substitute
Calculate the depreciation when inflation is applied.
Year | MACRS Rate(a) | Before Tax Cash Flow(b) | Depreciation(c) |
Calculate the before and after tax cash flows with inflation.
Year | Before tax cash flow |
MACRS Depreciation |
Taxable Income |
Income taxes |
After tax cash flowActual dollars |
Use trial and error method.
Try
Substitute
Thus, the rate of return after tax without inflation is
Conclusion:
The rate of return is increased in with inflation method.
Want to see more full solutions like this?
Chapter 14 Solutions
Engineering Economic Analysis
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education