Reference no: EM132354897

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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