Reference no: EM132351057
Question
Problem 1:You are evaluating the proposed acquisition of a new computer. The
computer's price is $ 7 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 $ 28 ,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.
Year
MACRS Percent
1
0.33
2
0.45
3
0.15
4
0.07
Problem 2: Johnson Jets is considering two mutually exclusive projects. Project A has an up-front cost of $124,000 (CF0 = -124,000), and produces positive after-tax cash inflows of $30,000 a year at the end of each of the next six years. Project B has an up-front cost of $59,000(CF0 = -59,000) and produces after-tax cash inflows of $20,000 a year at the end of the next four years. Assuming the cost of capital is 10.5%,
1. Compute the equivalent annual annuity of project A in box 1. Round the EAA to a whole dollar without the dollar sign or comma, e.g., 3452 (non-negative number)
2. Compute the equivalent annual annity of project B in box 2. The same format as box 1.
3. Decide which project to undertake in box 3, either Project A or Project B.
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