Question

Refer to Real Time, Inc. What is the operating cash flow in Year 2? Real Time, Inc. 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 $5,000. 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 $30,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent.

$ 9,000

$10,240

$11,687

$13,453

$16,200

Answer 1

Answer is “$16,200”

Initial Investment = $40,000
Useful Life = 3 years

Depreciation Year 1 = 33% * $40,000
Depreciation Year 1 = $13,200

Depreciation Year 2 = 45% * $40,000
Depreciation Year 2 = $18,000

Depreciation Year 3 = 15% * $40,000
Depreciation Year 3 = $6,000

Year 2:

Operating Cash Flow = (Incremental Revenue - Incremental Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($20,000 - $5,000) * (1 - 0.40) + 0.40 * $18,000
Operating Cash Flow = $15,000 * 0.60 + 0.40 * $18,000
Operating Cash Flow = $16,200