(The following information applies to the next four problems.) The president of
ID: 2794568 • Letter: #
Question
(The following information applies to the next four problems.) 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 to the MACRS 3-year las (33% 45% 15% and 7% Purchase of the computer would require an increase in net working capital of $2,000 at the very beginning of the analysis (assume that this will be captured back only at the very end of the analysis). The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by S5,000 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 (assume that the increase in net working capital is captured back in the last period, and that all depreciation related cashflows are to be evaluated at the nominal risky rate, 14 percent). 1"What is the net investment required at t- 0 (include changes in net working capital)?Explanation / Answer
Solution :
Answer is -$42,000
Notes:
Net Investment reauired at t=0 is the cost of New computer & the New investment in additional Net working capital due to the acquisition
Net Investment reauired at t=0 = -$40,000 - $2,000 = -$42,000
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