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 into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $ 6 ,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. What is the total value of the terminal year non-operating cash flows at the end of Year 3? Round it to a whole dollar, and do not include the $ sign.

Year MACRS Percent

1 0.33

2 0.45

3 0.15

4 0.07

Answer 1

Written down value of computer at the end of year 3	2,800
Selling Price	25,000
Gain on Sale	22,200
Tax on Gain	8,880
After tax salvage value	16,120
Recovery of working capital	6,000
Non-Operating cash flows at the end of year 3	22,120

А. 1 Written down value of computer at the end of year 3 =40000*0.07 2 Selling Price 25000 3 Gain on Sale =B2-B1 4. Tax on Gain =B3*40% 5 After tax salvage value =B2-B4 6 Recovery of working capital 6000 7 Non-Operating cash flows at the end of year 3 =B5+B6 8