You are evaluating the proposed acquisition of a new computer. The computer\'s p
ID: 2628906 • Letter: Y
Question
You are evaluating the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $ 4 ,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $ 19 ,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent.
What is the total value of the terminal year non-operating cash flows at the end of Year 3? Round it to a whole dollar, and do not include the $ sign.
Year
MACRS Percent
1
0.33
2
0.45
3
0.15
4
0.07
Year
MACRS Percent
1
0.33
2
0.45
3
0.15
4
0.07
Explanation / Answer
After tax salvage value = 19000-(19000-40000*7%)*40%= 12520
Release of woking capita = 4000
total value of the terminal year non-operating cash flows at the end of Year 3= 12520+4000= 16520
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