The president of Real Time Inc. has asked you to evaluate the proposed acquisiti

Question

The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new machine. The machine's price is $30,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase in net operating working capital of $2,000. The computer would increase the firm's before-tax revenues by $26,000 per year but would also increase operating costs by $13,000 per year. The machine is expected to be used for 3 years and then be sold for $12,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. What is the operating cash flow in Year 2? Round it to a whole dollar, and do not include the $ sign. Year MACRS Percent 0.33 0.45 0.15 0.07 2 3

Explanation / Answer

Year 0 1 2 3 Increase in revenue 26000 26000 26000 Increase in costs 13000 13000 13000 Depreciation 9900 13500 4500 EBT 3100 -500 8500 Tax @ 40% 1240 -200 3400 PAT 1860 -300 5100 Add: Depreciation 9900 13500 4500 Less: Net WC 2000 -2000 Less:investment 30000 Add: salvage 12000 Less: tax 3960 Cash Flow -32000 11760 13200 19640 OCF in Year 2 13200

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