Share
Explore BrainMass

What is the NPV for Real Time Inc.?

Please provide detailed answer in MS Excel file and text file

Given the information in the attachment, what is the NPV?

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

Attachments

Solution Preview

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

Cost 40,000
Change in NWC 2,000
Total 42,000

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

Year Percent Basis Depreciation
1 0.33 $40,000.00 $ 13,200.00
2 0.45 $40,000.00 $ 18,000.00
3 0.15 $40,000.00 $ 6,000.00
4 0.07 $40,000.00 $ 2,800.00
$ 40,000.00

Operating Cash Flows
Year 1 Year 2 Year 3
1 Increase in Revenues $20,000.00 $ 20,000.00 $20,000.00
2 Increase in Costs $ (5,000.00) $ (5,000.00) $ (5,000.00)
3 Before-tax change in earnings $15,000.00 $ 15,000.00 $15,000.00
4 After-tax change in earnings (line 3 X .60) $ 9,000.00 $ 9,000.00 $ 9,000.00
5 Depreciation $13,200.00 $ 18,000.00 $ ...

Solution Summary

This solution is comprised of a detailed explanation to find NPV for Real Time Inc. in both Word and Excel files.

$2.19