Question

The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $ 8 0,000, 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 $30,000 per year but would also increase operating costs by $ 18 ,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 net cash flow at t = 0? Cash outflow should be in negative number, e.g., -33,000, and do not include the $ sign.

Answer 1

Net cash flow in year 0 = Cost + increase in NWC

Net cash flow in year 0 = -80,000 + (-6,000)

Net cash flow in year 0 = -86,000