You are evaluating the proposed acquisition of a new computer. The computer's price is $ 7...

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You are evaluating the proposed acquisition of a new computer.The computer's price is $ 7 0,000, and it falls into the MACRS3-year class. Purchase of the computer would require an increase innet operating working capital of $2,000. The computer wouldincrease the firm's before-tax revenues by $ 27 ,000 per year butwould also increase operating costs by $ 15 ,000 per year. Thecomputer 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 theproject's cost of capital is 14 percent.
What is the operating cash flow in Year 2? Roundit to a whole dollar, and do not include the $ sign.

Year
MACRS Percent
1
0.33
2
0.45
3
0.15
4
0.07

Answer & Explanation Solved by verified expert

3.9 Ratings (456 Votes)

	0	1	2	3
Increase in before tax revenues		$ 27,000	$ 27,000	$ 27,000
Increase in operating costs		$ 15,000	$ 15,000	$ 15,000
Depreciation		$ 23,100	$ 31,500	$ 10,500
Incremental NOI		$ -11,100	$ -19,500	$ 1,500
Tax at 40%		$ -4,440	$ -7,800	$ 600
Incremental NOPAT		$ -6,660	$ -11,700	$ 900
Add: Depreciation		$ 23,100	$ 31,500	$ 10,500
Incremental operating cash flow		$ 16,440	$ 19,800	$ 11,400
			Answer

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You are evaluating the proposed acquisition of a new computer.The computer's price is $ 7 0,000, and it falls into the MACRS3-year class. Purchase of the computer would require an increase innet operating working capital of $2,000. The computer wouldincrease the firm's before-tax revenues by $ 27 ,000 per year butwould also increase operating costs by $ 15 ,000 per year. Thecomputer 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 theproject's cost of capital is 14 percent.What is the operating cash flow in Year 2? Roundit to a whole dollar, and do not include the $ sign.YearMACRS Percent10.3320.4530.1540.07