The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer system. The computer systems price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer system would require an increase in net operating working capital of $2,000. The new system 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 system is expected to be used for three years and then be sold for $25,000. The firms marginal tax rate is 40%, and the projects cost of capital is 14%.
a) What is the net investment required at time period: t = 0.
b) What is the new projects NPV?
In the attached Excel spreadsheet under Corporation B, the solution provides all the calculations and a conclusion about the project.