Question

The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $360,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12. Year 1 $ 175,000 Year 2 218,000 Year 3 83,000 Year 4 70,000 The firm is in a 35 percent tax bracket and has a cost of capital of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Calculate the net present value. (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 Summit Petroleum Corporation purchase the asset? Yes No

Answer 1