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Consider the following investment, in an inflationfree economy. A company is considering the purchase of a $20,000 asset that will be used for only 2 years (project life). The salvage value of this asset at the end of 2 years is expected to be $5,000. The asset will generate annual revenue of $30,000 but is expected to have an annual expense of $6,000. The investment will be classified as a 3MACRS property (tax life) with annual depreciation allowances of $3,333, $4,444, $1,481, and $741. The marginal income tax rate for the firm is 25%. The firms inflationfree interest rate (i) is 10%.

a. Determine the aftertax cash flow (ATC) for this investment project.

b.The firm expects an average inflation rate (f) of 5% during the project period, but it also expects an 8% annual increase in revenue and a 6% annual increase in expense. No increase in salvage value is expected. Compute the present value of this investment.