The president of Lowell Inc. has asked you to evaluate the proposed acquisition

Question

The president of Lowell Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $60,000, and it falls into the MACRS 3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4). 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 $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 4 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?

$19,800

$10,240

$11,687

$13,453

$16,200

a.

$19,800

b.

$10,240

c.

$11,687

d.

$13,453

e.

$16,200

Explanation / Answer

answer is A - 19800

SAVINGS INCREASED COST PROFIT DEPRECIATION PROFITAFTER DEPRECIATION CASH FLOW AFTER TAX DEPRECIATION CASH FLOW 1 20000 5000 15000 19800 -4800 -2880 19800 16920 2 20000 5000 15000 27000 -12000 -7200 27000 19800 3 4

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