Question

The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $50,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in spare parts inventory of $3,000. Accounts payable will also increase by $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. Annual interest expense is $500 per year. The computer is expected to be used for 3 years and then be sold for $35,000. The firm's marginal tax rate is 20 percent, and the project's cost of capital is 12 percent. MACRS Depreciation Rates are: Year 1: Year 2: Year 3: Year 4: 33% 45% 15% 7% Refer to Real Time Inc. What is the net investment required at t = 07(2 points) Refer to Real Time Inc. What is the operating cash flow in Year3? (2 points)

with work please

Answer 1

6.Net Investment Required = Purchase price of Computer + Working capital Investment

Net Investment Required = 50000 + 3000 - 2000

Net Investment Required = 51000

7. Operating cash Flow in Year 3 = (Incremental Revenue - Operating Costs -Annual interest Expense ) * (1 - tax) + Depreciation tax shield

Operating cash Flow in Year 3 = (20000 - 5000 -500) * (1 - 0.20) + 50000 * 15% * 20%

Operating cash Flow in Year 3 = 11600 + 1500

Operating cash Flow in Year 3 = $13100

8. Terminal Year Non operating cash Flows = return of Working Capital + Sale of assets - (Sale of Assets - (Book Value - Accumulated Depreciation) * Tax rate

Terminal Year Non operating cash Flows = 1000 + 35000 - (35000 - (50000 - 50000*93%)) * 20%

Terminal Year Non operating cash Flows = 1000 + 35000 - (35000 - 3500) * 20%

Terminal Year Non operating cash Flows = 29700

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