Purchase Solution

# What is the NPV for Real Time Inc.?

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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.

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

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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 \$ ...

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