Question

Problem 12-27 MACRS depreciation and net present value [LO12-4] The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $300,000 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 $ 145,000 Year 2 191,000 Year 3 66,000 Year 4 64,000 The firm is in a 30 percent tax bracket and has a cost of capital of 5 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