Question

The Data Tank, Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $60,000, and it falls into the 4-year straight-line depreciation to $4,000. The purchase of the computer would require an increase in net operating working capital of $3,500. The computer would increase the firm's before-tax revenues by $60,000 per year but would also increase operating costs by $8,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000 at the end of Year 3. The company will recover all capital at the end of the operation cycle. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 11 percent.

The MACRS table - 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4.

Do you accept the project or reject the project using the NPV rule?

Answer 1

NPV=-60000-3500+3500/1.11^3+(25000-(25000-(60000-4000)/4)*40%)/1.11^3+((60000-8000-(60000-4000)/4)*(1-40%)+(60000-4000)/4)/11%*(1-1/1.11^3)
=44050.41382

Yes, Accept the project as NPV is positive