Pensacola Cablevision Company gives television cable service to two counties in the Florida pan-handle. The firm's management is considering the construction of a latest satellite dish in December of 20x0. The new antenna would enhance reception and the service given to customers. The dish antenna and related equipment will cost $200,000 to purchase and install. The company's old equipment, which is fully depreciated, can be sold now for $20,000. The company's president expects the firm's enhanced capabilities to result in additional revenue of $80,000 per year throughout the dish's useful life of seven years. The incremental operating expenses related with the new equipment are projected to be $10,000 per year. These incremental revenues and expenses are in real dollars.
The new satellite dish will be depreciated beneath the MACRS depreciation schedule for the 5 year property class. The company's tax rate is 40 percent.
Pensacola Cablevision's president expects the real rate of interest in the economy to remain stable at 10 percent. She expects the inflation rate, presently running at 20 percent, to remain unchanged.
Required:
1) Calculate the price index for each year from 20x1 through 20x7, by using 1.000 as the index for 20x0.
2) Make a schedule of after tax cash flows measured in real dollars.
3) Calculate the next present value of the proposed new satellite dish by using cash flows measured in real dollars. Use a real discount rate equivalent to the real interest rate.