Real Time Inc. Project Analysis
president of Real Time Inc. has asked you to evaluate the proposed acquisition
of a new computer. The computer’s price is $40,000, 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 $20,000 per year but would also increase operating costs
by $5,000 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 projects NPV?? Should they go
forward and complete the project? Why?
Macrs 3 Year Schedule
Annual
Year Depreciation
1 33%
2 45
3 15
4 07
2. The
initial equity capital of Toys 4 Tots, Inc. consisted of 10 million shares sold
at $0.25 par value per share. The company has been in business for a year and
has earned net income of $500,000, paid $100,000 in dividends, and retained the
balance. The stock is now selling at 15x earnings. Calculate its market value
per share. Discuss what this figure represents.
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