Problem:
The President of Real Time Inc. has asked you to evaluate the proposed aquisition of a new computer. The computer's price is $40,000, and it falls in MACRS 3-year class. The applicable depreciation rates are 33%, 45%, 15%, and 7%. Purchase of the computer would require an increase in accounts payable of $2,000. The computer would have an EBT and depreciation of $15,000. The computer's expected use is 3 years and then sold for $25,000. The firms marginal tax rate is 40%, and the project's cost of capital is 14%.
Required:
Question 1: What is the NPV?
Question 2: What is the total value of the trminal year non-operating cash flows at the end of year 3?
Question 3: What is the net investment requited at t=0?
Question 4: What is the operating cash flow in year 2?
Note: Provide support for your underlying principle.