Capital budgeting part 2

# Capital budgeting part 2 - Sample Problems-Capital...

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Sample Problems Capital Budgeting part 2 Use the following information to answer the next four problems. The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer’s price is \$40,000, and it falls i nto the MACRS 3-year class. Purchase of the computer would require an increase in net working capital of \$2,000 (at time 0). 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 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. 1. What is the net investment required at t=0? 2. What is the operating cash flow in Year 2? 3. What is the total value of the terminal year non-operating cash flows at the end of year 3? 4. What is the project’s NPV? Use the following information to answer the next two problems. You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's price is \$60,000. The truck falls into the MACRS three-year class, and it will be sold after four years for \$15,000. Use of the truck will require an increase in net working capital (spare parts inventory) of \$2,000. The truck will have no effect on revenues, but it is expected to save the firm \$20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. 5. What is Year 0 net cash flow (net investment)? 6. What is the operating cash flow in Year 1? The President of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer.

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