The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $ 5 0,000, 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 $ 24,000 per year but would also increase operating costs by $ 18,000 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. What is the operating cash flow in Year 2? Round it to a whole dollar, and do not include the $ sign.

Question

Hillary Oconnell

Business

1 January, 08:40

The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $ 5 0,000, 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 $ 24,000 per year but would also increase operating costs by $ 18,000 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. What is the operating cash flow in Year 2? Round it to a whole dollar, and do not include the $ sign.

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Answers (1)

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Richmond · Answer 1

The operating cash flow in year 2 is 3600

Explanation:

Operating Cash flow is gotten by subtracting outflows from inflows and adjusting for tax and changes in working capital.

In year 2, the outflow is 18,000 while the inflow is 24,000 which gives the net cash flow of 6,000. Tax of 40% on 6000 is 2400, leaving an operating cash flow of 3,600.