The Norcross Fiber Company is considering automating its piece-goods screen-printing system at a cost of $20,000. The firm expects to phase out the new printing system at the end of five years due to changes in style. At that time, the firm could scrap the system for $2,000 in today's dollars. The expected net savings due to automation also are in today's dollars (constant dollars):
End of Cash Flow
Year (in Constant $)
1................................... $22,000
2................................... 19,000
3-5................................. 15.000
The system qualifies as a five-year MACRS property and will be depreciated accordingly. The expected average general inflation rate over the next five years is approximately 5% per year. The firm will finance the entire project by borrowing at l0%. The scheduled repayment of the loan will be:

The firm's market interest rate for project evaluation during this inflation-ridden time is 20%. Assume that the net savings and the selling price will be responsive to this average inflation rate. The firm's marginal tax rate is known to be 40%.
(a) Determine the after-tax cash flows of this project in actual dollars.
(b) Determine the net present-value reduction for gains) in profitability due to inflation.

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End of Year Interest Principal Payment $6,042 6,647 7.311 Payment $2,000 1,396 731