Question

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

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