1.) The president of Real Time Inc. has asked you to evaluate the proposed acqui

Question

1.) The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $ 80,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $ 5,000. The computer would increase the firm's before-tax revenues by $30,000 per year but would also increase operating costs by $ 16,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. What is the net cash flow at t = 0? (Must be a negative number.)

2.) The president of Real Time Inc. has asked you to evaluate 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 $ 6 ,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 $ 20 ,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?

3.) Mars Inc. is considering the purchase of a new machine that costs $60,000. This machine will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method (shown below) to depreciate the machine, and it expects to sell the machine at the end of its 5-year life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but the net working capital will return to the original level when the project is over (i.e., after 5 years). Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. Calculate the net cash flows of the project. (Cash outflows should be negative number.)

Explanation / Answer

1) Purchase of computer at T0           (80,000.000) Investment in working capital at T0             (5,000.000) Net cash flow at T0           (85,000.000) Note:Operating costs and revenue will be incrred from T1. 2) Non operating cash flows is the sale of computer and sale of Net working capital Salvage value             20,000.000 Tax @40%               8,000.000 Salvage value net of tax             12,000.000 Conversion of working capital into cash               6,000.000 Total non opertaing cash flows(12000+6000)             18,000.000 PVF at end of 3 year(1/(1.14*1.14*1.14)                        0.675 PV of non operating cash flows at end of year3             12,150.000 Hi Student   We answer 1 question every post. You have asked for 3 questions in 1 Post which is quite unfair. But still I have answered 2 questions out of 3. Kindly post 3 question as a separate question

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