Pensacola Cable Company provides cable in two counties. The firm's management is considering the construction of a new satellite dish in December of 20x0. The new antenna would improve reception and the service provided to customers. The dish antenna and associated equipment will cost $200,000 to purchase and install. The company's old equipment which is fully depreciated can now be sold for $20,000. The company president expects the firms improved capabilities to result in additional revenue of $80,000per year during the dish's useful life of 7 years. The incremental operating expenses associated with the new equipment are projected to be $10,000 per year. These incremental revenues and expenses are in real dollars.
The new satellite dish will be depreciated under the MACRS depreciation schedule for the 5 year property class. The company's tax rate is 40 percent.
Pensacola Cable Company president expects the real rate of interest in the economy to remain stable at 10 percent. She expects the inflation rate, currently running at 20 percent to remain unchanged.
Question 1: Compute the price index for each year from 20x01 through 20x07 using 1.0000 as the index for 20x0.
Question 2: Prepare a schedule of after-tax cash flows measured in real dollars.
Question 3: Compute the net present value of the proposed new satellite dish using cash flows measured in real dollars. Use a real discount rate equal to the real interest rate.