You are evaluating the proposed acquisition of a new computer. The computer\'s p

Question

You are evaluating the proposed acquisition of a new computer. The computer's price is $ 4 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 $2,000. The computer would increase the firm's before-tax revenues by $ 24 ,000 per year but would also increase operating costs by $ 13 ,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 operating cash flow in Year 2? Round it 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

Explanation / Answer

Cost of Equipment = $40,000

Depreciation for Year 2 = $40,000 * 0.45
Depreciation for Year 2 = $18,000

Incremental Revenue = $24,000
Incremental Operating Cost = $13,000

Operating Cash Flow in Year 2 = (Incremental Revenue - Incremental Operating Cost) * (1 - tax) + tax * Depreciation
Operating Cash Flow in Year 2 = ($24,000 - $13,000) * (1 - 0.40) + 0.40 * $18,000
Operating Cash Flow in Year 2 = $13,800

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