ISC Production Corporation is evaluating a capital expenditure proposal to acquire and install a computer integrated manufacturing system. The proposed CIM system will have the same total productive capacity as the current manufacturing system. The computer equipment and machinery will require an initial cash investment of $2,000,000. The system has a projected life of 6 years; however, the equipment and machinery will qualify as 5-year property for income tax depreciation purposes. The income tax rate is 40%. In addition to machinery and equipment, software development is expected to cost another $200,000 in the first year. Software costs are amortizable tax purposes by the straight-line method over a 5-year period. Maintenance costs are expected to increase by $25,000 a year over the current system. The annual cash savings from the CIM system relative to the current manufacturing system (before any adjustment for the effects of inflation or income taxes) are expected to be as follows:

The expected salvage value for the equipment and machinery at the end of the project is $100,000 (based on current used equipment and machinery prices). Inflation is anticipated at an annual rate of 8%, and inflation is expected to affect all cash inflows and outflows.
Required:
(1) Compute the inflation-adjusted net after-tax inflow from savings for the CIM proposal for each year, and determine whether the total cash savings from the CIM system will exceed the system's cost. (Use the MACRS depreciation rates provided in Exhibit 22-4, and round the price-level index used to three decimal places.)
(2) Compute the payback period for the proposed investment in a CIM system.
(3) Assuming the company's cost of capital is 14%, compute the net present value of the proposed investment in a CIM system

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Reduced Reduced Contibution Reduce Labor Cost $15,000 25,000 30.000 30,000 30,000 30,000 Machine Inventory Margin Avoided 1 CIM System $200,000 300,000 400,000 Year Time 50,000 60,000 60,000 60,000 60,000 $25,000 35,000 40,000 40,000 40,000 40,000 600,000 700,000