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You are evaluating the proposed acquisition of a new computer. The computer's price is $ 7...

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Finance

You are evaluating the proposed acquisition of a new computer.The computer's price is $ 7 0,000, and it falls into the MACRS3-year class. Purchase of the computer would require an increase innet operating working capital of $2,000. The computer wouldincrease the firm's before-tax revenues by $ 27 ,000 per year butwould also increase operating costs by $ 15 ,000 per year. Thecomputer 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 theproject's cost of capital is 14 percent.
What is the operating cash flow in Year 2? Roundit 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 & Explanation Solved by verified expert
3.9 Ratings (456 Votes)

0 1 2 3
Increase in before tax revenues $      27,000 $        27,000 $       27,000
Increase in operating costs $      15,000 $        15,000 $       15,000
Depreciation $      23,100 $        31,500 $       10,500
Incremental NOI $    -11,100 $      -19,500 $         1,500
Tax at 40% $       -4,440 $        -7,800 $             600
Incremental NOPAT $       -6,660 $      -11,700 $             900
Add: Depreciation $      23,100 $        31,500 $       10,500
Incremental operating cash flow $      16,440 $        19,800 $       11,400
Answer

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Transcribed Image Text

You are evaluating the proposed acquisition of a new computer.The computer's price is $ 7 0,000, and it falls into the MACRS3-year class. Purchase of the computer would require an increase innet operating working capital of $2,000. The computer wouldincrease the firm's before-tax revenues by $ 27 ,000 per year butwould also increase operating costs by $ 15 ,000 per year. Thecomputer 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 theproject's cost of capital is 14 percent.What is the operating cash flow in Year 2? Roundit to a whole dollar, and do not include the $ sign.YearMACRS Percent10.3320.4530.1540.07

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