# Capital Budgeting

I am evaluating a proposed acquisition of a new computer for my company. 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.

1) What is the net investment required at t = 0?

2) What is the operating cash flow in Year 2?

3) What is the total value of the terminal year non-operating cash flows at the end of Year 3?

4) What is the project's NPV?

https://brainmass.com/business/capital-budgeting/capital-budgeting-128882

#### Solution Preview

1) What is the net investment required at t = 0?

Initial investment:

Cost ($40,000)

Change in NWC (2,000 )

Total ($42,000)

2) What is the operating cash flow in Year 2?

Operating cash flow

Depreciation schedule:

Depreciable basis = $40,000.

MACRS Depreciation Amount is

Year Percent Basis Depreciation

1 0.33 $40,000 $13,200

2 0.45 ...

#### Solution Summary

The solution explains how to calculate the project cash flows and the NPV.