what is the net investment required at t = 0 what is the operating cash flow in
ID: 2796675 • Letter: W
Question
what is the net investment required at t = 0what is the operating cash flow in year 2
what is the total value of the terminal non operating cash flow at year 3
The president of Real Time Inc. has asked you to evaluate the proposed computer's price is $40,000, and it falls into the MACRS 3-year class (3 The following information applies to the next four problems.) acquisition of a new computer. The 39 0,45%, of the computer would require an increasein net working capital of $2,000 at th 15% and 7%) analysis (assume that this will be captured back only at the very end of the ery beginning of the increase the firm's before-tax revenues by $20,000 per year but would als S5,000 per year. The computer is expected marginal tax rate is 40 percent, and the project's cost of capital is 14 percent (assume that the increase in n o, 15%, and 7%). Pur osts to be used for 3 years and then be sold for $25,000. The firm's working capital is captured back in the last period, and that all depreciation related cashflows are to be evaluated at the nominal risky rate, 14 percent). 1 What is the net investment required at t 0 (include changes in net working capital)? 20What is the operating cash flow in Year 2? What is the total value of the terminal year non-operating cash flows at the end of Year 3 (look at value recovery and change in net working capital)? 22What is the project's NPV?
Explanation / Answer
a) Investment required at t=0 will be-
Investment amount for purchase of the Computer - $ 40000
Add- Additional Working Capital Required - $ 2000
Net Investment Required at t= 0 - $ 42000
b) Operatiing Cash Flow in Year Two will be-
Increase in before Tax Revenues - $ 20000
Increase in Operating Cost - $ 5000
So, Operating Cash flow in Yr 2 is 20000-5000 = $ 15000
c) Non Operating Cash Flows-
Recovery of Net Working Capital at the end of terminal year = $ 2000
Recovery value of Computer = $ 25000
Total Value of Non Operating Cash flows = $ 27000
d) NPV can be calculated as follows-
Depreciation
Dep. Rate
Dep Amount
Tax Benefit of Dep.
Net Operating Cash Flow- Net of Tax
Total Benefit after tax
Discounted @ 14%
Yr 1
40000
33%
13200
5280
9000
14280
12526.31579
Yr 2
26800
45%
12060
4824
9000
13824
10637.11911
Yr 3
14740
15%
2211
884.4
9000
9884.4
6671.688455
Total
29835.12336
NPV
Therefore NPV is negative
(5,764.52)
Depreciation
Dep. Rate
Dep Amount
Tax Benefit of Dep.
Net Operating Cash Flow- Net of Tax
Total Benefit after tax
Discounted @ 14%
Yr 1
40000
33%
13200
5280
9000
14280
12526.31579
Yr 2
26800
45%
12060
4824
9000
13824
10637.11911
Yr 3
14740
15%
2211
884.4
9000
9884.4
6671.688455
Total
29835.12336
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