Problem:
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.
a. What is the net investment required at t = 0?
b. What is the operating cash flow in Year 2?
c. What is the total value of the terminal year non-operating cash flows at the end of Year 3?
d. What is the project's NPV?