(The following information applies to the next four problems.) The president of
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(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
Depreciation = MACRS % x Investment
Cash Flows = Investment + NWC + After-tax Salvage Value + Profits + Depreciation
NPV = -CF0 + CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3, where r=14%
Computer 0 1 2 3 MACRS 33% 45% 15% Investment -40,000 Salvage 25,000 NWC -2,000 2,000 Revenues 20,000 20,000 20,000 Cost -5,000 -5,000 -5,000 Depreciation -13,200 -18,000 -6,000 EBT 1,800 -3,000 9,000 Tax (40%) -720 1200 -3600 Profits 1,080 -1,800 5,400 Cash Flows -42,000 14,280 16,200 29,520 NPV $2,916.85Related Questions
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