Question

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $240,000. Of this amount, $190,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $50,000. The depreciated assets will have zero resale value. Use Table 12-12.

The contract will require an additional investment of $54,000 in working capital at the beginning of the first year and, of this amount, $34,000 will be returned to the Spartan Technology Company after six years.
The investment will produce $75,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 8 percent cost of capital.
A.) Calculate the net present value

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Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $340,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years. Use Table 12-12.

		Earnings before Depreciation
Year 1		$	121,000
Year 2			140,000
Year 3			100,000
Year 4			60,000
Year 5			55,000
Year 6			32,000

The firm is in a 25 percent tax bracket and has a 12 percent cost of capital.

A.) calculate the net present value

Answer 1

1)