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Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost...

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $440,000. 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 $ 120,000 Year 2 190,000 Year 3 130,000 Year 4 71,000 Year 5 70,000 Year 6 40,000 The firm is in a 30 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? Yes No

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Answer #1
Year-1 Year-2 Year-3 Year-4 Year-5 Year-6
Earnings before dep 120000 190000 130000 71000 70000 40000
Less: Depreciation 88000 140800 84480 50688 50688 25344
Before tax Income 32000 49200 45520 20312 19312 14656
Less: Tax @ 30% 9600 14760 13656 6093.6 5793.6 4396.8
After Tax Income 22400 34440 31864 14218.4 13518.4 10259.2
Add: Depreciation 88000 140800 84480 50688 50688 25344
Annual cashflows 110400 175240 116344 64906.4 64206.4 35603.2
PVF at 12% 0.892857 0.797194 0.71178 0.635518 0.567427 0.506631
Present value of cashflows 98571.43 139700.3 82811.36 41249.19 36432.44 18037.69
Present value cash inflows 416802
Less: Initial investment 440000
NPV -23198
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