The president of Real Time Inc. has asked you to evaluate the proposed acquisiti

Question

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 in the MACRS 3-year class. The applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. 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 three years and then sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. Refer to Real Time Inc. What is the total value of the terminal year non-operating cash flows at the end of Year 3?

Explanation / Answer

Non Operating cashflows would be from sale of computer at 25000

Now the book vallue at the end of 3 yesr would be given by= 7%*40000= 2800

So the capital gain would be of (25000-2800) = $22200

Tax applicable pon the same would be 40% = 40% * 22200

=8880

Hence terminal year non-operating cashflows = 25000-8880

= $16120

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.