Question 1. 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 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 $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. What is the projects NPV?? Should they go forward and complete the project? Why?
Macrs 3 Year Schedule
Annual
Year Depreciation
1 33%
2 45
3 15
4 07
Question 2. The initial equity capital of Toys 4 Tots, Inc. consisted of 10 million shares sold at $0.25 par value per share. The company has been in business for a year and has earned net income of $500,000, paid $100,000 in dividends, and retained the balance. The stock is now selling at 15x earnings. Calculate its market value per share. Discuss what this figure represents.