(The following information applies to the next four problems.) The president of
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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 into the MACRS 3-year class (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 $5,000 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)Explanation / Answer
Opearting Cashflow :
Operating Cash flow for Year 2 = $16,200
Working Note :
Depreciation Schedule :
S No Particulars Yr 1 Yr 2 Yr 3 1 Increase in revenue 20000 20000 20000 2 Increase in costs -5000 -5000 -5000 3 Change in earnings - Before tax 15000 15000 15000 4 Change in earnings - After tax (Point 3 * 0.6) 9000 9000 9000 5 Depreciation 13200 18000 6000 6 Depreciation tax saving (Point 5 * 0.4) 5280 7200 2400 Net Operating CF s (4+6) 14280 16200 11400Related Questions
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