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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 fall into the MACRS 3-year class. Purchase of the computer would require an increase in net 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 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.

a. What is the net investment required at t = 0?

b. What is the operating cash flow in Year 2?

c. What is the total value of the terminal year non-operating cash flows at the end of Year 3?

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Category:- Basic Finance
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