IBC, Inc. is considering the purchase of a $320,000 computer that has an economic life of 5
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Question:
IBC, Inc. is considering the purchase of a $320,000 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 $60,000 in 5 years. The use of computer will save annual costs of $120,000 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 $60,000 immediately, and it will be recovered at the end of year 5. The firms tax rate is 40% and its cost of capital is 12%. |
- What is the initial investment requirement (t=0)?
- What is the operating cash flow one year from today (t=1)?
- What is the operating cash flow two years from today (t=2)?
- What is the operating cash flow three year from today (t=3)?
- What is the operating cash flow four years from today (t=4)?
- How much tax is the firm expected to pay when the asset is sold for $60,000 in year 5?
- What is thetotalcash flow five year from today (t=5)?
- What is the project's NPV?
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