The City of Prince George is considering the purchase of a photocopying machine for $7,300 on December 31, 2010, useful life five years, and no residual value. The cash operating savings are expected to be $2,000 annually, measured in 2010 dollars. 

The minimum desired rate is 14 percent, which includes an element attributable to anticipated inflation of 6 percent. (Remember that the city pays no income taxes.) 

Use the 14 percent minimum desired rate for requirements 1 and 2: 

1. Compute the net present value of the project without adjusting the cash operating savings for inflation. 

2. Repeat requirement 1, adjusting the cash operating savings upward in accordance with the 6 percent inflation rate. 

3. Compare your results in requirements 1 and 2. What generalization seems applicable about the analysis of inflation in capital budgeting?