The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a...

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Finance

The president of Real Time Inc. has asked you to evaluate theproposed acquisition of a new asset and you found the followingdata:
MACRSclass:
3-year (33%, 45%, 15%, 7%)
EconomicLife:
3 years
Price:
$300,000
Freight andInstallation:
$30,000
SalvageValue:
$60,000
Effect on NWC :
Increase by $10,000
Revenues:
$300,000/year (100,000 units at $3/unit)
Operating Costs excl. depreciation:
50% of sales revenue
Taxrate:
40%
Cost ofcapital
10%
Use the Project Cash Flow Table below to calculate the relevantafter tax cash flows, and then answer the questions concerninginvestment cost, cash flows, tax on capital gain from sale of theasset, and net present value.
What is the net investment required at t = 0?
What is the non-operating terminal cashflows at the end of Year 3?
How much tax is the firm expected to pay when the asset is soldfor $60,000 in year 3?
What is the project's NPV?
What is the operating cash flow in Year 2?
What is the operating cash flow in Year 1?
What is the operating cash flow in Year 3?

Answer & Explanation Solved by verified expert

3.9 Ratings (646 Votes)

The net investment required at t0 Price of an asset 30000000 Freight and installation 3000000 Increase in NWC 1000000 The net investment required at t0 34000000 The nonoperating terminal cash flows at the end of Year 3 Recovery of NWC 1000000 Sale of asset 6000000 Tax 40 of Gain on sale of an asset 40 of 36900 1476000 See Answer

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The president of Real Time Inc. has asked you to evaluate theproposed acquisition of a new asset and you found the followingdata:MACRSclass: 3-year (33%, 45%, 15%, 7%)EconomicLife: 3 yearsPrice: $300,000Freight andInstallation: $30,000SalvageValue: $60,000Effect on NWC : Increase by $10,000Revenues: $300,000/year (100,000 units at $3/unit)Operating Costs excl. depreciation:50% of sales revenueTaxrate: 40%Cost ofcapital 10%Use the Project Cash Flow Table below to calculate the relevantafter tax cash flows, and then answer the questions concerninginvestment cost, cash flows, tax on capital gain from sale of theasset, and net present value.What is the net investment required at t = 0?What is the non-operating terminal cashflows at the end of Year 3?How much tax is the firm expected to pay when the asset is soldfor $60,000 in year 3?What is the project's NPV?What is the operating cash flow in Year 2?What is the operating cash flow in Year 1?What is the operating cash flow in Year 3?

MACRSclass:	3-year (33%, 45%, 15%, 7%)
EconomicLife:	3 years
Price:	$300,000
Freight andInstallation:	$30,000
SalvageValue:	$60,000
Effect on NWC :	Increase by $10,000
Revenues:	$300,000/year (100,000 units at $3/unit)
Operating Costs excl. depreciation:	50% of sales revenue
Taxrate:	40%
Cost ofcapital	10%