IBC, Inc. is considering the purchase of a $300,000 computer that has an economi
ID: 2656993 • Letter: I
Question
IBC, Inc. is considering the purchase of a $300,000 computer that has an economic life of 5 years. The computer will be depreciated according to 5-year MACRS schedule (20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%). The market value of the computer will be $50,000 in 5 years. The use of computer will save annual costs of $100,000 for the next five years. For simplicity, these cost savings are assumed to occur at the end of these years. As a result of this project, the net working capital will increase by $40,000 immediately, and it will be recovered at the end of year 5. The firm’s tax rate is 40% and its cost of capital is 12%.
2. What is the initial investment requirement (t=0)?
$140,000
$200,000
$240,000
$260,000
$340,000 1 points QUESTION 51 1. What is the operating cash flow one year from today (t=1)?
$73,824
$74,250
$83,040
$84,000
$98,400 1 points QUESTION 52 1. What is the operating cash flow two years from today (t=2)?
$73,824
$74,250
$83,040
$84,000
$98,400 1 points QUESTION 53 1. What is the operating cash flow three year from today (t=3)?
$73,824
$74,250
$83,040
$84,000
$98,400
IBC, Inc. is considering the purchase of a $300,000 computer that has an economic life of 5 years. The computer will be depreciated according to 5-year MACRS schedule (20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%). The market value of the computer will be $50,000 in 5 years. The use of computer will save annual costs of $100,000 for the next five years. For simplicity, these cost savings are assumed to occur at the end of these years. As a result of this project, the net working capital will increase by $40,000 immediately, and it will be recovered at the end of year 5. The firm’s tax rate is 40% and its cost of capital is 12%.
2. What is the initial investment requirement (t=0)?
$140,000
$200,000
$240,000
$260,000
$340,000 1 points QUESTION 51 1. What is the operating cash flow one year from today (t=1)?
$73,824
$74,250
$83,040
$84,000
$98,400 1 points QUESTION 52 1. What is the operating cash flow two years from today (t=2)?
$73,824
$74,250
$83,040
$84,000
$98,400 1 points QUESTION 53 1. What is the operating cash flow three year from today (t=3)?
$73,824
$74,250
$83,040
$84,000
$98,400
IBC, Inc. is considering the purchase of a $300,000 computer that has an economic life of 5 years. The computer will be depreciated according to 5-year MACRS schedule (20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%). The market value of the computer will be $50,000 in 5 years. The use of computer will save annual costs of $100,000 for the next five years. For simplicity, these cost savings are assumed to occur at the end of these years. As a result of this project, the net working capital will increase by $40,000 immediately, and it will be recovered at the end of year 5. The firm’s tax rate is 40% and its cost of capital is 12%.
2. What is the initial investment requirement (t=0)?
$140,000
$200,000
$240,000
$260,000
$340,000 1 points QUESTION 51 1. What is the operating cash flow one year from today (t=1)?
$73,824
$74,250
$83,040
$84,000
$98,400 1 points QUESTION 52 1. What is the operating cash flow two years from today (t=2)?
$73,824
$74,250
$83,040
$84,000
$98,400 1 points QUESTION 53 1. What is the operating cash flow three year from today (t=3)?
$73,824
$74,250
$83,040
$84,000
$98,400
Explanation / Answer
2. Initial investment required = $ 340,000.
Initial capital outlay = cost of computer + increase in working capital = $ 300,000 + $ 40,000 = $ 340,000.
3. Operating cash flows one year from today = $ 84,000.
Operating cash flows at the end of year 1 = annual cost savings x ( 1 - t ) + annual depreciation x t = $ 100,000 x 0.60 + $ 300,000 x 20% x 0.40 = $ 84,000.
4. Operating cash flows two years from today = $ 98,400.
Operating cash flows for year 2 = $ 100,000 x 0.60+ $ 300,000 x 32% x 0.40 = $ 98,400.
5. Operating cash flows three years from today = $ 83,040.
Operating cash flows for year 3 = $ 100,000 x 0.60 + $ 300,000 x 19.2 % x 0.40 = $ 83,040.