Question

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $240,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Earnings before Depreciation

Year 1 $ 77,000

Year 2 78,000

Year 3 57,000

Year 4 39,000

Year 5 29,000

Year 6 23,000

The firm is in a 35 percent tax bracket and has a 12 percent cost of capital.

a. Calculate the net present value. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

b. Under the net present value method, should Oregon Forest Products purchase the equipment asset?

Answer 1

Oregon	0	1	2	3	4	5	6
MACRS %		20%	32%	19.20%	11.52%	11.52%	5.76%
Investment	-240,000
EBD		77,000	78,000	57,000	39,000	29,000	23,000
Depreciation		-48,000	-76,800	-46,080	-27,648	-27,648	-13,824
EBT		29,000	1,200	10,920	11,352	1,352	9,176
Tax (35%)		-10,150	-420	-3,822	-3,973	-473	-3,212
Net Income		18,850	780	7,098	7,379	879	5,964
Cash Flows	-240,000	66,850	77,580	53,178	35,027	28,527	19,788
NPV	($32,142.69)

Depreciation = MACRS % x Investment

Cash Flows = Investment + Net Income + Depreciation

NPV can be calculated using the same function in excel or calculator with 12% discount rate.

As NPV < 0, the equipment should not be purchased.