The president of Lowell Inc. has asked you to evaluate the proposed acquisition

Question

The president of Lowell Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer’s price is $60,000 and it falls into the MACRS 3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4). Purchase of the computer would require an increase in net operating working capital of $2,000. 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 4 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 investment required at t=0?

Explanation / Answer

At t=0, the Net Investment required will be the Computer's price plus the increase in Net Operating Working Capital

= $ 60,000 + $ 2,000 = $ 62,000.

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