Fuller Ford Company is considering the purchase of a vertical drill machine. The machine will cost $50,000 and will have an eight‐year service life. The selling price of the machine at the end of eight years is expected to be $5,000 in today’s dollars. The machine will generate annual revenues of $20,000 (today’s dollars) but is expected to have an annual expense (excluding depreciation) of $8,000 (today’s dollars). The asset is classified as a seven‐year MACRS property. The project requires a working‐capital investment of $10,000 at year 0. The marginal income‐tax rate for the firm is averaging 35%. The firm’s market interest rate is 18%.

(a) Determine the internal rate of return of this investment.

(b) Assume that the firm expects a general inflation rate of 5%, but that it also expects an 8% annual increase in revenue and working capital and a 6% annual increase in expenses, caused by inflation. Compute the real (inflation‐free) internal rate of return. Is this project acceptable?